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Dan White: NAMA should keep its nose out and let house prices continue to fall

The latest CSO house price figures weren't just bad, they were terrible. House prices fell by an average of 2.1pc in June, the steepest monthly fall in more than two years, and are now down by more than 42pc since the peak.

The June house price figures indicate that, far from bottoming out, house prices still have further to fall. Which should come as no surprise to anyone with eyes in their head.

This year's census revealed that there were 294,000 houses and apartments vacant, more than one house in every seven, on census night last April.

This combination of massive over-supply and the reluctance of the banks to lend money to house purchasers has continued to push house prices even lower.

This has plunged tens of thousands of more homeowners into "negative equity", where the value of "their" home is less than the amount they owe on their mortgage.

Now NAMA is entering the fray. It is proposing to top up the amount that the banks are prepared to lend to purchasers willing to buy some of the apartments it owns.

What NAMA is proposing to do looks, initially, like a very good idea, in theory at any rate. With the banks unwilling to lend, even potential purchasers with steady incomes are "locked out" of the property market. If only somebody, i.e. NAMA, could "do something" to break the funding logjam, then suddenly tens of thousands of eager buyers would suddenly emerge and the fall in house prices would be miraculously reversed.

It's a seductive argument. Unfortunately it's also a bogus argument. As this month's auction of distressed properties, and the previous one in April, demonstrated, there already is no shortage of property buyers out there, but only at the right price.

Nobody wants to buy into a falling market. Why pay one price for a house or apartment today if it is going to be even cheaper tomorrow? That's currently the situation with the Irish housing market. Buyers, quite rightly in my opinion, are convinced that prices have further to fall and are keeping their hands very firmly in their pockets until house and apartment prices reach a sustainable floor.

Earnings

The bad news for existing homeowners is that we are still a considerable way off a house price floor. The average Dublin house price now stands at €225,000 and the average house price nationally is down to €175,000.

While these prices are way down on the prices reached at the peak of the boom, they still represent 6.4 and five times the average earnings respectively. In other words, despite falling by more than two-fifths over the past four years, Irish house prices are still massively over-valued when measured against average incomes. And, as the latest CSO figures demonstrate, incomes are also falling.

It is against this background of falling property prices and incomes that NAMA's plans to lend to buyers of its apartments must be judged. By lending money to people whose incomes are falling, to buy properties whose value is still falling, NAMA, far from kick-starting the housing market, runs the risk of adding even further to the almost 400,000 homeowners stuck in negative equity.

Am I alone in thinking that this is a seriously dumb idea?

NAMA should resist the temptation to "do something" and let house prices fall to a sustainable level.

It is only at such a level that buyers will re-emerge in significant numbers.

Anything else represents throwing good money after bad.


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