Tuesday 23 July 2019

Richard Curran: ''No housing bubble,' says Lane - but not enough houses either'

Philip Lane, Governor of the Central Bank. Photo: Damian Eagers
Philip Lane, Governor of the Central Bank. Photo: Damian Eagers
Richard Curran

Richard Curran

Outgoing Central Bank governor Philip Lane had very few words of comfort for Finance Minister Paschal Donohoe as the former heads off to Frankfurt to become new chief economist at the ECB.

Yes, the economy is growing at a clip. Yes, unemployment has fallen to very low levels. And yes, it looks like there isn't a major debt-fuelled housing bubble.

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In an interview with RTÉ's Sean Whelan, Lane went on to warn there are real risks of overheating in the economy. One way of preparing for this would be to run up larger budget surpluses, through higher taxation.

Lane said the high employment levels could lead to greater pressure on wages and add to the prospects of overheating, so even the good news around jobs carries its own risks.

Lane also warned that while there is no serious risk of a housing bubble, there simply aren't enough houses either. The task for the Government (and not the Central Bank) is to deliver more supply. Yet even on this point, Lane warned of the huge demands placed on the construction industry through commercial property building and the massive future task of home retrofitting to meet climate change targets.

The former Trinity College professor can take up his new role - which is a real personal achievement - comfortable in the knowledge that the Central Bank has curtailed excessive mortgage lending, forced the banks to build up bigger capital buffers and taken a more pro-active approach to regulation.

The regulator has applied the brakes all over the place. Now he is suggesting that the Government considers doing the same. The difference is that Lane and his successor don't have to get elected through a national vote.

There is a clamour for more money to be spent on public services, from Army wages and school building, to health and social housing. Given that the exchequer finances have performed so well in recent years, and an election looms ever larger on the horizon, the Finance Minister is already in a very tough situation when it comes to dampening down expectations.

Throw into the mix the fact the exchequer has become increasingly dependent on uncertain corporation tax receipts, and the challenges look even bigger.

Of course, based on pure logic, the Central Bank governor's suggestion about preparing for a rainy day funded through higher taxes makes perfect prudent sense. You can spend more on public services if you raise taxes to pay for it, he said. But politics isn't just about logic. It is about winning elections.

To some extent the Central Bank has done a good job fending off a credit-fuelled boom in housing by keeping a tight rein on bank lending. So there is no housing bubble risk.

Equally, if house prices were to fall as part of a wider economic malaise or downturn, the impact on ordinary households would not be nearly as dramatic as 2008 because people are not overextended on new loans in the same way.

Yet housing is the number one problem area for many people right now. No housing bubble, but not enough houses at affordable prices.

Lane is an astute observer of the economy and he can see the constraints on the construction industry which simply does not have the skilled labour in sufficient numbers to build all the office blocks, retrofit existing housing stock and build tens of thousands of new homes at affordable prices.

This suggests there won't be a solution to the housing crisis any time soon.

It is a real headache for Leo Varadkar's Government. But not for Lane, who will be assessing the macroeconomic performance of the entire eurozone from his office in Frankfurt. Sometimes being an economist does trump being a politician.

Eir fund's feeding frenzy

Eir chief executive Carolan Lennon was quick to defend the company's bond re-financing which saw it hand over €400m to two hedge-fund shareholders who own around 35pc of the company between them.

Eir raised €1.1bn to refinance a €700m bond, with the extra cash going to two of its three shareholders. French telecom billionaire and 65pc shareholder Xavier Niel did not receive any of the cash payout.

The company also said it would not return to the bond markets until it has completed its €1bn investment programme. This kept the bond investors happy and rating agencies retained the credit rating on the firm.

But it does have some reminders of the kind of refinancing days of Eir's past when private equity investors loaded it up with debt. This latest payout brings Eir net debt to ebitda ratio back to where it was two years ago.

Bear in mind that its latest results showed a 2pc decline in revenues in the first quarter, albeit that earnings went up by around 7pc.

One of the beneficiaries of the €400m cash-back deal was New York-based fund Anchorage Capital. It had just 3pc of Eir in 2012 when the telco emerged from examinership and gradually bought out Blackstone and others to become the biggest shareholder with majority voting rights.

It reduced its stake when it sold some of its shareholding to Niel. Anchorage would have received around €260m from the recent bond refinancing. Its shareholding reduced from more than 40pc to 26pc with the Niel deal, for which it probably received around €250m to €280m based on an Eir valuation of €1.4bn.

At this rate it could have bagged about €510m to €540m and is sitting on a 26pc stake, which could be worth about €350m to €400m. The Eir investment fund feeding frenzy isn't over.

Shrinking Nama costs more

Nama has revised upwards its estimated final return to the exchequer once again. It now believes it will be €4bn. Nama chairman Frank Daly reckons the State will receive about €2bn in 2020 and another €2bn in 2021. Good news for Paschal Donohoe, or whoever is Finance Minister at the time. Mind you they will probably already have spent the money by the time it comes in.

The €4bn payout suggests to many that Nama has been a success, although the property industry is full of developers who would disagree.

Nama's goal has been to shrink relatively quickly as its loan balances deplete and it moves closer to the end of its life - as it were.

So it is surprising that last year Nama cost more to run than in 2017. Administrative expenses were up €8m at €75.4m. Costs charged by the NTMA were €1.2m higher; legal fees were €2.6m higher; finance, communication and technology costs were €1.6m higher, while rent and occupancy costs shot up by 140pc to €6.3m.

Termination payments which include statutory and other redundancy payments came in at €1.9m while the group paid out €600,000 in "gardening leave".

The basic pay bill did drop from €23.2m to €22m but last year Nama paid out €1m in performance-related pay. The agency had nine staff earning more than €175,000 per year.

Staff numbers have been falling, but it still had 238 staff in 2018.

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