Lenihan about to announce his borrowing for Nama…

Sadly, I’ll be in transit when the Dail sits down today to debate the detail put before them by Minster of Finance Brian Lenihan. Shame, because it would make for a great live blog… The government has been brigading the beneficiaries of their upcoming largesse in to their offices partly, one assumes, to din into them just how crucial it is that they’ve been honest in their estimates of their exposure. Dermot Desmond is of a mind with David McWilliams and reckons the banks’ minds should be concentrated by being made to clear up their own mess. And yesterday, Morgan Kelly gave us a rare hard look at Nama’s prospects for recovering value from Ireland’s overblown property market:MOrgan begins by examining that bubble (the one that remains the central question in that still delayed Zoe group ruling):

In Ireland, between 1995 and the peak of the boom in 2007, the average price of housing and commercial property roughly tripled, adjusting for inflation, while disposable incomes increased by one half. Two previous booms fit this pattern closely: Japanese urban land in the 1980s, and Irish agricultural land in the late 1970s.

He uses both examples to point to a general principle:

In ordinary times, property prices grow at the same rate as national income: people in industrialised economies spend much the same fraction of their income on housing as they did a century ago.

However, a surge in prosperity, which drives property prices higher and encourages banks to lend more on appreciating assets, can lead to a self-reinforcing cycle of rising prices and rising lending.

Eventually, banks get a fright and return to levels of lending they used to regard as prudent, causing prices to fall back to where they were before the bubble. Just like Irish farmland in the 1970s, and Japanese property in the 1980s, our recent property boom was the product of unsustainable bank lending.

Between 2000 and 2007, while nominal GNP rose by 77 per cent, mortgage lending rose from €24 billion to €115 billion, lending to builders from €2.4 billion to to €25 billion, and to developers from €5 billion to €80 billion. Should the usual post-bubble correction occur in Ireland, it would suggest that real prices of residential and commercial property would return to their levels of the mid-to-late 1990s, two thirds below peak values. [emphasis added]

Here’s the rub, property speculation is an economically useless activity. In fact most often it distracts people from engaging in economically useful activity. It’s expected that “the bond issue is expected to be in the region of €60 billion, implying a one-third discount from the original estimate of transferring loans worth €90 billion”. Now look at Morgans’s guestimates from the past, and on property assets you’re looking at a discount of 75% after the full fall in value and you can see why the Zoe judgement is late in coming…

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  • Mack
  • tom

    “it would suggest that real prices of residential and commercial property would return to their levels of the mid-to-late 1990s, two thirds below peak values.”

    What does this mean exactly? I bought my first home in 1995 for £51000 punts. Is Morgan kelly saying you’ll soon be able to buy a 3 bed semi on the outskirts of Dublin for that sort of money? That means I’ll be able to buy a house almost in full from my personal savings – can’t see it happening meself!

    Back in 1995 a middle to low interest rate was seen to be 6 to 7.5% – but that was close to the very peak in the last cycle. That’s one big difference between 95 and now.

    tom

  • Mick Fealty

    Well, Kelly’s calculus can’t be taken in isolation. There’s the backwash from the various stimulus packages and quantitative easing to come, which may mean the kind of inflation levels we’ve not seen in a generation… We could do with some kind of rationale from the centre as we go along…

  • He said credit remains the lifeblood of any economy and said the only way to restore the flow of credit was through cleaning up the banking system and that was the rationale behind Nama.He also denied Nama was a bailout for developers, stressing in the Dáil that it would pursue borrowers over their debts and had the power to seize personal assets secured against the loans.