MATT COOPER: How can you value something that people can’t afford or don’t want?

The predictions are subjective and, it could be said, designed to suit whatever side of the argument people were paid to be on. Some of those making them had been correct before and others wrong, but as the ads say, past performance is no indicator of future performance

HOW much is any piece of property worth? Whatever somebody else will pay for it would seem like a reasonable answer. Remember that phrase that “you can’t buck the market”.

The market sets the right price between buyer and seller. Although there are other factors that come into play the point is that free trade between roughly equal parties should allow for the setting of a reasonable valuation or establish a fair worth on a property.

Except we now know that’s not quite true. It is nowhere near as easy as that to establish what a property is worth. All sorts of property was sold in recent years at prices way higher than the asset being purchased was worth. All sold at the price at which they were valued, which is a big difference from what they were worth.

And what are all these property assets, valued so highly until the crash, worth now? Well, clearly a fraction of what they were valued at once. There are price indices from lenders/estate agents that report house prices are down about 27% from their peak, but this is nonsense. The fall in prices has been far more severe. But price does not denote worth. It is possible some properties are valued at less than they’re really worth simply because there is nobody with the money to buy them.

It’s equally the case that the prices being demanded for some properties, or the valuations attached to them, remain higher than their actual worth because the sellers don’t want to accept reality. Which is very relevant to the big debate underway as to what various pieces of property throughout the country are worth: this is part of the exercise to decide how much the proposed NAMA will pay the banks for loans it holds, made to the purchasers of the land.

NAMA is not buying the land; it is buying the loans from the banks. Ownership of the land remains with the developer/business/individual but of course if they cannot make the required repayments to NAMA, now that it will own the loan, then the property will pass to the State when its value becomes even more important because the State will want to sell it again.

NAMA, with the help of people deemed to have an expertise in this area, is trying to establish the “long-term economic worth” rather than fixing on the present-day value because this should help it estimate better what various properties, or rather the loans attached to them, might be worth in those circumstances.

Instead of paying, say, 30% of the book value of the loans, because this reflects the current estimated price of the land secured by the loans, NAMA may be prepared to pay maybe 70%, in the expectation that, over time, the value of the loans will be established at the price paid by the State for them. NAMA’s many critics believe this approach runs the risk of the State giving the banks excessively generous payments for the transferred loans. Many want the loans transferred at a price that reflects the current value of the assets to which they are attached, thereby saving the State from massive losses and from making effectively free gifts of cash to the banks. It is easy to understand why, but it is not as clean and simple a solution as it first seems.

Who can ascertain the worth of property of any kind with any degree of certainty? This week, for example, the High Court was given a range of predictions by economic forecasters as to the likely prospects for economic recovery and how it would impact on the fortunes of property speculators such as Liam Carroll whose property empire was applying again for court protection from creditors who want immediate repayment of money owed.

The predictions from both sides in the argument were based on reasonable assumptions, but varied dramatically. They are subjective and, it could be said, designed to suit whatever side of the argument people were paid to be on. Some of those making predictions had been correct before and others wrong, but as the ads say, past performance is no indicator of future performance.

We heard property valuer John Mulcahy, of Jones Lang La Salle, but now on secondment to the interim NAMA body, tell an Oireachtas committee that property prices could rebound to 88% of where they were before the fall. They may well do so, but it could take 10 or 20 years to happen and Mulcahy’s track record in predictions is no more brilliant than anyone else’s.

He also seems to have forgotten the positive spin he put on things two years ago – and I was at a business function less than two years ago where he talked positively about the property market – by claiming he saw the writing on the wall and spoke about it four years ago, as if this now gave him greater credibility to call an upturn. For what’s it worth, and you can put your own value on my thoughts, here’s how I see it. One of the reasons why so many valuations have fallen so sharply is that nobody has the cash to buy property or land at the much cheaper prices that are being asked. Few people or companies have enough spare cash to buy something without taking out a loan from the bank. They can’t get money from the banks, who simply don’t have it to lend or who are too worried that they might lend too much again against an asset that is still falling in price. This is going to keep pushing prices downwards. It’s why the idea is that the banks who sell the loans to NAMA will use the bonds they are given in return as a way to borrow money themselves from the European Central Bank. Then they will have money to lend again, some of which will go to people or businesses who want to buy the vacant or cheap properties.

Competition for cheap assets, and the supply of money that can be borrowed to buy them, will not just get trade going again but will send prices upwards. The current market values will be seen as excessively low, the logical conclusion to the bust that followed the illogical boom.

HOWEVER, a supply of fresh money is not going to do the trick on its own. The biggest problem is oversupply of properties that nobody wants. There are empty housing estates and apartment blocks that will take years to fill.

Much was made of pent-up demand during the boom years when 90,000 housing units a year were being built, but the reality was that too many of the units were purchased by investors who intended renting the properties. Worse, they were prepared to accept rents that offered minimal return on their capital investments in the vain belief that prices would continue to rise and they would make gains on the eventual sale of the properties.

Too many others invested for tax reasons. These people have all gone from the market now. Buyers who want homes are few and far between too: young people are fearful for their jobs and/or incomes and don’t want to emulate their peers who are suffering from negative equity.

When it comes to commercial units it is estimated that about 20% are vacant. This means there will no new building here either for years to come and it could be ages before these units are rented, even at much lower prices, because existing businesses will not be looking to move or expand and new ones will not be interested in coming to this economy for many years. With rents falling the rationale for buying from developers is reduced dramatically. It is a natural consequence of the economic slump. We’ve gone from irrational exuberance to outright fear.

Who would want to take out a mortgage now, even if there is a perception of great value in some lowly priced ones?

The Last Word with Matt Cooper is broadcast on 100-102 Today FM, Monday to Friday, 4.30pm to 7pm.


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