Constipated property market needs a tonic

DURING the bubble, the Irish economic system came to resemble a snake, swallowing indigestible loan-financed assets.

NAMA was set up to clear the property loans from the Irish banking system.

The originator of the scheme, Peter Bacon, had felt that the best solution to the colossal property and related loans of the banks was to deal with them swiftly and remove over €150 billion of same, cleaning their balance sheets at a stroke.

The Fianna Fáil government balked at this, and cut NAMA in half, removing “only” €72bn of loans. Thus, from the outset, the Irish banking system was crippled. Like an anaconda that has swallowed a pig, it found itself unable to move backwards or forwards, and with only half the pig removed it is now clear that the banks are unable to process these, or to restore credit. We recall the heady days when NAMA advocates stated, as a matter of faith, that “NAMA will get credit flowing”.

One of the key problems that NAMA has created is that it has effective control over a vast overhang of property. It’s a vast empire, opaque and closed to the people who fund it, structured in a way to ensure that although the taxpayer is on the hook for its losses, it is closed to scrutiny, bar the occasional stage show where the very highly paid management turn up to be quizzed for a few hours by an Oireachtas committee.

The NAMA design is flawed. While NAMA aims to try to make a profit, it has an incentive to sit on its assets until, Micawber-like, something — property prices — turns up. And that is unlikely to happen in the short or even medium term. NAMA has two main tranches of property — commercial and residential.

And, let’s not forget that the banks, via the smaller developers (those with sub €20 million in loans) and residential mortgages, are also looking at the residential property market in Ireland with hopes, if not expectation, of resurrecting it.

NAMA priced the loans that it bought from the banks with reference to November 2009 prices. It’s now clear that these were a major overpayment. Since then, commercial property prices have fallen by a further 18% and residential prices by 20%, although there has been a rise in the London property market which accounts for a small portion of NAMA assets. There’s no sense yet that we are at or near the bottom.

The Irish commercial property market can best be described as sickly, with most activity being driven by movement to higher spec/lower cost offices and premises by persons taking advantage of this weakness.

The residential market is deader then the dinosaur, with the result that the property crash is actually slower than it should be. Prices in Northern Ireland have fallen from a (relatively smaller) peak by over 50%, while here they are down by just over 40%. Planning permissions have collapsed to one third of the peak, while sales remain stagnant.

While a large part of this retardation can be down to greater “stickiness” here in terms of more onerous bankruptcy and a lower propensity to repossess, a large part must be down to the gigantic overhang of residential property.

We do not know how large this overhang is — estimates have ranged from 40,000 to 140,000, from one to seven years “normal demand”. Until this is cleared, normal market activity cannot resume and we cannot know the true cost of the crash.

NAMA and the state and the banks are locked in a financial standoff, as ugly as the ending of Reservoir Dogs. When NAMA loses money, it is state money.

If the banks lose money, then yes, it’s again state money, as they have no space capacity. But the rotten meat of the oversupply of residential properties in NAMA and in the banks is clogging their ability to generate credit.

Nobody wants to see a re-igniting of the property bubble but without some economic laxative being applied to the banks and NAMA they will continue to sit, dyspeptic and immobile. Yet, all assets have a price: it is a matter of finding that price.

I have suggested for over a year that we have the ideal mechanism — eBay. NAMA is going through a complete, costly and opaque system of auctions for the various goodies it has taken from the developers. The banks are auctioning off in bits and pieces the swampy fields, decaying ghost estates and weed-infested sites. But they are not selling.

Let’s have some vision. Instead of paying massive auction fees, and instead of waiting for something to happen, like Godot meets Micawber, lets see Michael Noonan instruct NAMA to put it on eBay. The economic house having burned down, it’s time to embrace the firesale.

EBay is a wonderful, worldwide, cheap auction platform. There is an ocean of international money that would conceivably purchase some Irish property.Of course, this process would crystallise the losses in both the NAMAsaurus and the banks, but then we would be clear where we were, instead of sailing up denial with an undigested lump in our economic gut. What price clarity?

*Brian M Lucey is Professor of Finance, School of Business Studies, Trinity College, University of Dublin


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