'Nationalisation' bobs on the horizon
As confidence in Nama's ability to deliver wobbles, the long-term economic value of property is crucial, writes Marc Coleman
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If one person in government needs and deserves a holiday, it is Brian Lenihan. With the weight of An Bord Snip, Nama, and pretty soon the report of the Commission on Taxation on his heroic shoulders, the man must be liable to snap any time now. If we're not careful, he'll soon be seen wandering Stephen's Green in an unshaven, dishevelled state, talking to the pigeons.
Alas, last Tuesday's Nama legislation suggests the strains might be bearing down. With confidence wobbling that Nama's property values can recover, and clear hints that the Government is averse to paying over the odds for them, the word "nationalisation" appears once again on the horizon.
It is not, as the minister said in the Dail recently, inevitable. But if a line in the explanatory memorandum prepared by the Department of Finance is anything to go by, that word is going to get more than an airing when Thursday's draft legislation becomes a bill on September 16.
That is when the Government will tell us in detail how it intends to price the loans that Nama will buy from the banks. What we know now is that the price paid will be based on current market prices, but adjusted for "long-term economic value".
Not only for Nama, but also for hundreds of thousands of anxious homeowners -- and for our economy's competitiveness -- the idea of the long-term economic value of property is a crucial one. As Nama is a knacker's yard for the riskiest property in the land -- and largely excludes residential property -- whatever the legislation says about pricing is likely to overstate the extent of decline facing homeowners. Residential property may not be safe as houses, but it sure is safer than fields or half-built shopping malls.
On this, I personally remain relatively optimistic. Affordability has improved by two-fifths since September and, even after the recession has done its worst, employment levels and real incomes will in 2011 be roughly what they were back in 2005.
I don't believe that a national average house price of less than €200,000 (Economic and Social Research Institute house price index for mid-2002) is appropriate for Ireland's housing culture. Nor do I believe that the million or more people who took out new mortgages since 2002 (my estimate, based on Irish Banking Federation figures) will never see the value of their properties recover to their original value.
But on two counts, the Government seems to disagree.
The first is a clue contained in the memorandum commenting on what the banks are likely to be paid for their assets: "In many cases, the long-term economic value will be significantly less than the outstanding loan."
The second relates to a chat I had with a junior minister last Tuesday. He was convinced that prices were already back at 2002 levels, and needed to stay there to restore Ireland's competitiveness. Abolishing stamp duty would only reflate the market, he said.
The first belief is a contradiction in terms. The second is just plain wrong. The third is madness. As Nama's self-proclaimed mission makes clear, there is currently no property market to speak of, but a crisis-ridden, nervous wreck of a
thing, wandering aimlessly and talking to pigeons.
As for current prices reflecting reality, Nama legislation (section 58, subsection 1) eloquently points out that current prices are meaningless and that we will only be able to form a view on the market based on "the value that the property can reasonably be expected to attain in a stable financial system when current crisis conditions are ameliorated". That is, we need to wait until the economic cycle begins climbing up, hopefully in 12 months' time. And as for stamp duty, anyone who thinks the market can recover when buyers are forced to find €40,000 from somewhere just to buy a house -- when other buyers are too scared to buy what they are trying to sell -- doesn't understand markets.
Unfortunately, the junior minister is not alone in his 50 per cent theory, nor in his views on stamp duty. Before taking up his position, Brian Lenihan's economic adviser Alan Ahearne said property prices would fall by 50 per cent. He also implied that abolishing stamp duty would be tantamount to reflating the market.
Again, I respectfully disagree on both counts. Despite falls in nominal after-tax income, affordability is up significantly. It is only self-fulfilling and irrational comment based on superficial comparisons with the US that is keeping buyers from paying perfectly affordable 2005 prices. Compar-isons with US-style property downturns are inappropriate. Ireland's interest rate cycle is less volatile, labour mobility is much lower, and Irish people spend more time in their homes and attach more personal value to them (Irish mortgages are also harder to default on).
Once stamp duty is abolished, our property cycle from peak to trough should be much more modest than in the US. Of course, if prominent commentators keep talking it down, it won't be. Reflation and deflation are monetary, not fiscal phenomena. Changes in tax rates merely change the position of the market, not the speed at which it is changing.
But I am a mere humble scribe. The minister, his adviser and the junior minister are high officers of State. But if they truly believe that those of us who bought our houses after 2002 -- a million of us -- are stuck in permanent negative equity, they had better come out and say it clearly. And they had better come clean on September 16 and admit that Nama discounts on properties will -- given their far riskier profile -- need to be much larger. Meaningful recapitalisation of our banks will be made virtually impossible and nationalisation virtually inevitable.
Of course, if the Government thinks I am wrong, so be it. But then this must be rationally reflected in whatever details are presented to us in late August. To tell us that residential house prices will fall by 50 per cent from peak levels, but to ask taxpayers to underwrite discounts of 20 or 30 per cent on comparable commercial properties, is not just illogical -- it is heinous. Those who must bear the lifetime burden of negative equity would in this case be asked to protect banks from theirs.
I believe that the residential property prices prevailing in early 2005 are consistent with a competitive economy and can be achieved by a Nama- style approach: taking a balanced view over the economic cycle. And by the abolition of stamp duty. If this tax remains while a property tax is introduced, ministers won't need to go talking to pigeons. They'll be fed to them in little pieces.
Marc Coleman is Economics Editor of Newstalk 106 to 108FM
