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…