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Monday 16 September 2019

'Anecdotal evidence' is behind Kelly predictions

Latest alarmist doom warning is derived from newspaper estimates

DOOM LORD: Morgan Kelly in Kilkenny, forecasting the latest apocalypse. Photo: Gerry Mooney
DOOM LORD: Morgan Kelly in Kilkenny, forecasting the latest apocalypse. Photo: Gerry Mooney


THE latest alarmist claim by economist Morgan Kelly of yet another wave of mass mortgage defaults appears to have been based on little more than "anecdotal evidence" and "estimates" published in the Irish Times property section 15 months ago, the Sunday Independent can reveal.

Professor Kelly shocked his audience at the Kilkenny Arts Festival last weekend with predictions of additional banking losses of several billion euro, which he said would come from 10,000 mortgages given out "at the peak of the bubble" to "lawyers, solicitors and estate agents" to purchase properties of €1m to €2m.

But now that prediction by the UCD economist has been thrown into question following a query from this newspaper in which we sought evidence from him to support his latest sensational warning.

Asked last Wednesday where the statistics to support his claim could be found, Prof Kelly forwarded an article from the Irish Times property section, which -- judging by the web address at the bottom of the email from his UCD email account -- had been cut and pasted from the 'Property Pin' internet discussion board.

Originally published on May 6 last year, the story, which was penned by Irish Times commercial property editor Jack Fagan, warned specifically of the dangers facing an "estimated 10,000 accountants, lawyers and other professionals who spent between €1m and €2m each on buying homes with a typical loan-to-value mortgage of 80 per cent" at "the height of the property boom".

Those remarks were echoed to a large degree by Prof Kelly in Kilkenny last weekend in the course of delivering the annual Hubert Butler Lecture.

In comments that stirred his 500-strong audience, he said: "What worries me increasingly are mortgages and in particular, there's a group of mortgages given out, interest-only mortgages which were given out to professionals, to lawyers, solicitors, estate agents at the peak of the bubble, 10,000 of these were given out."

Explaining his concerns, he added: "It turns out these mortgages were for properties of €1m to €2m each.

"So these guys (buyers) put up about 20 per cent of the price, so 10,000 of these loans of about €1.1m each, that means about €11bn in loans to these high rollers of the boom, most of whom could barely buy you a cup of coffee now."

That Prof Kelly appears to have based his argument solely on the contents of an Irish Times property report from 15 months ago is sure to raise questions within the academic community on the degree of rigour he applies to his research before delivering economic predictions, which at this stage arguably have the potential to lift or lower Ireland's economic outlook.

It will also raise questions for the thousands of ordinary people across the country, many of whom have come to accept the UCD economist's views as an article of faith since he quite correctly called the bursting of the Irish property bubble in a prescient article in the Irish Times in 2006.

Since that article's publication, Prof Kelly's reputation -- domestically and internationally -- has grown in almost inverse proportion to the battered Irish economy.

Last March, Vanity Fair magazine's renowned writer Michael Lewis sought out Prof Kelly while writing his account of Ireland's economic crisis. The resulting article, When Irish Eyes Are Crying, which grabbed international attention featured a photograph of Prof Kelly relaxing with a cup of coffee in a Dublin city-centre pub.

Intriguingly, in his interview with Mr Lewis, the UCD academic describes his early research in 2006 into Ireland's property bubble, saying: "I just started googling things."

While that and Prof Kelly's apparent reliance on figures reported by the Irish Times property supplement for his latest prediction should be worrying, a further examination of the evidence supporting his latest numbers only serves to heighten that concern.

For while the Irish Times report did not directly identify the source of its projections as the Irish Brokers' Association (IBA), it did conclude with a warning from the organisation that with the value of many of these properties down by 50 per cent, "another disaster is waiting to unfold".

Contacted by the Sunday Independent, a spokesman for the IBA confirmed that the information in the Irish Times article had been issued in a press release to the newspaper in April of last year.

Intriguingly, that press release contains a quotation from IBA chief executive Ciaran Phelan (which went unreported) in which he warned of the dangers of rising interest rates to an estimated 10,000 homeowners on long-term, interest-only mortgages.

"The majority of those affected have jumbo €1,000,000-plus mortgages, originally taken out by professionals invariably on substantial fee-based income during the height of the boom. The professionals include solicitors, accountants, property developers, etc.

"Until now, the low interest rates have camouflaged this problem -- protecting mortgage holders in the short term. However, interest rates are now on the up and repayment affordability will shortly become a major problem as €1,000s are added to the monthly repayments," Mr Phelan said.

Asked what evidence the IBA had for its assertions, its spokesman said the organisation had derived its estimate using data from Moody's, the Central Bank and what he described as "internal conversations" with IBA members.

Commenting on this, the spokesman said: "The attached communication was issued to the Irish Times in April 2010, calling for the banning of interest-only mortgage lending. This was in response from anecdotal evidence from its brokers of difficulties being experienced by their clients being pressurised by their banks to start making capital repayments.

"As no exact figures were being made public, they could only estimate the numbers using data from Moody's, Central Bank and their own conversations with members."

But while the IBA, the Irish Times and Morgan Kelly might stand over those estimates, stamp-duty statistics supplied by the Revenue Commissioners to the late Finance Minister Brian Lenihan in June 2010 in response to a question by Fine Gael's Leo Varadkar appear to undermine their case.

An examination of the Revenue's figures throws up just 849 cases where it can be said definitively that the property was valued in excess of €1m. These transactions took place between November 5, 2007 and the end of 2008.

The figures for these 14 months are available as a consequence of changes introduced in the stamp-duty regime in the Budget of December 5, 2007, in which the then Finance Minister Brian Cowen announced the introduction of a 9 per cent stamp duty rate to be paid on the balance of the price of all properties valued at €1m plus.

Prior to this change, the Revenue statistics show that between 2004 and November 5, 2007, a total of 12,767 residential properties were sold at prices above €635,000

While this figure is significant, it certainly does little to support Prof Kelly's contention that 10,000 mortgages of "about €1.1m" each were given out "at the peak of the bubble", a peak which a range of economic commentators have argued took place between 2005 and 2006.

In those two years, a total of 7,435 properties with values of €635,000 and above were sold. And while that number is also substantial, it does not tally with Prof Kelly's estimate of 10,000 mortgages on properties valued between €1m and €2m.

The UCD economist's contention that these 10,000 mortgages were given out to solicitors, lawyers and estate agents is also questionable, judging by the numbers registered with the relevant professional bodies at the height of the boom.

According to a spokesman for the Law Society, there were 10,649 solicitors on the roll in 2006. But the number of solicitors with a practising certificate that year was just 7,377.

A spokeswoman for the Bar Council of Ireland said that its membership in 2006 amounted to about 1,900 barristers.

A spokesman at the Society of Chartered Surveyors Ireland (SCIS) -- the professional body now responsible for estate agents -- said the IAVI had 2,077 members in 2006.

Taken together, the entire membership of the three professional bodies in 2006 amounted to somewhere in the region of 11,354, or just 1,354 more than the 10,000 "high rollers of the boom" who Prof Kelly claims took out mortgages of €1.1m each at the "peak of the bubble".

When asked if they had ever conducted a survey of their respective members' average earnings, spokespersons for all three professional bodies said they had not.

And while it remains unclear how Prof Kelly determined the earning power of 10,000 solicitors, lawyers and estate agents at the height of the boom, his remark that "most of them could barely buy you a cup of coffee now" may yet be supported by evidence that is substantive, as opposed to anecdotal.

Sunday Independent

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