Leading economist hits out at Lenihan on house price claim

A LEADING economist has taken issue with Finance Minister Brian Lenihan’s claim that people can now buy houses in confidence as prices have become realistic.

Prof Karl Whelan of University College Dublin said most people would be “wary” of such claims given the problems affecting the market, such as mortgage interest rate hikes, falling wages and worryingly high levels of unemployment.

“Perhaps the minister sees part of his job to ‘talk up the economy’, but, unfortunately from the perspective of most people who are thinking of buying a house, there’s a lot of negative factors still coming down the road,” Prof Whelan said.

Mr Lenihan made the claim in an interview with the Sunday Independent newspaper when discussing state agency NAMA, which is removing €81bn of high-risk property and development loans from the troubled banks in a bid to cleanse their balance sheets.

In buying the loans, NAMA is insisting on a steep “haircut” or discount in recognition of the fact that the properties underpinning them have fallen dramatically in value.

The first tranche, involving €16bn of loans, is being acquired at an average discount of 47%, meaning NAMA will pay circa €8.5bn.

Mr Lenihan appeared to indicate that prices in the residential market would similarly stabilise at a realistic level because of NAMA.

“One of the good things about the steep discount, averaging 47%, is that the residential property market will now be stabilised at a realistic level,” he was quoted as saying. “You can now buy in confidence that the price is realistic.”

However, Prof Whelan said he did not think there was any direct connection between NAMA and the residential market.

“Perhaps I’m being stupid here, but I’m having troubles linking (a) the setting of prices that the Government is willing to pay to banks for non-performing property loans (largely backed by commercial or development property) with (b) prices that people are willing to pay for residential properties,” he wrote in a blog entry on Irisheconomy.ie.

“The minister reckons the NAMA transfers will act to boost the residential property market. Just playing devil’s advocate, one could point to a large surplus of properties for sale, high unemployment, pay cuts, future tax increases, higher mortgage interest margins, and future increases in ECB interest rates as factors that could act against whatever positive effect the NAMA transfers are supposed to have.”

On RTÉ Radio yesterday, Prof Whelan said: “There may be somebody out there who, you know, reads the minister’s comments and says: ‘Things have hit bottom and I’m going to go out and buy a house.’ But I suspect most people are likely to be a bit more wary than that.”

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