Former head of Bank of Ireland Mike Soden indicated to the Examiner that NAMA should intervene in the Irish property market, specifically stating that:“The easiest solution, in my judgement, is that NAMA has got the responsibility of establishing a base price, or a floor price, for property in the country.”[poll id=”75″]
That this would be a mistake seems obvious (at least to me). How can a firm that lacks monopolistic control set price levels for a whole market? And without widespread credit available from the banks who are you hoping will be the purchasers of the property?
There are about 14,000 residential units held by NAMA but 9,200 of them are rented out already (hat tip to NamaWineLake) and the remainder have either been sold (700) or are not ready (4,000). So what was Soden getting at?
He is referring to the greed motive which he mentioned specifically “if you woke up tomorrow morning and the headlines in the Thursday property section of the newspapers read that property prices had increased by 10%, the wonderful factor of greed would re-enter the marketplace, and you would find that there is a turn in the marketplace”.
The question is whether NAMA have the ability to create a ‘Property Put’ in the same way that former Federal Reserve Chairperson Alan Greenspan famously implemented the ‘Greenspan Put‘. The issue here though is that NAMA is not the market, they are a large chunk of it but they can’t adequately influence the credit cycle, the business cycle of the economy or create liquidity.
They could underwrite loans by selling a property then making a loan note out of the transaction, but do they have the ability to do that? And if so do they want to do it? The issue of liquidity won’t go away easily. Bank of Ireland recently stated that they want to increase their margins, the only way to do this (and this goes for every bank) is to raise the cost of borrowing, lower the deposit rates they pay and shed staff.
We are likely to see a situation where the market goes beyond ‘reasonable value’, this over-correction has already been spotted by the Central Bank using different metrics. Their research indicates that “Irish house prices are between 12 to 26 per cent below the level suggested by fundamental factors within the economy”.
Ed Glaeser wrote a fascinating paper for The National Bureau of Economic Research (NBER) which indicates that cheap credit was accountable for 20% of the boom prices, but we don’t know if an absence of credit explains 20% of an over-correction, so it may be that even if bank credit started to flow that it wouldn’t lift all ships and for that reason I can’t help but continue to disagree with Mike Soden – the intention is right, but the solution and operational prospects are not compatible with the objective.
It takes time for markets – in particular illiquid property markets – to go through their full cycle, which means that confidence will probably return only after we have passed by the bottom. I looked at this on Today FM recently with Derek Brawn (economist), Frank Quinn (lecturer in valuations) and Ed Carey (former head of SCSI) and we all came to the same conclusion – the show is here, check it out from about halfway through.
The conclusion was that you have to look to yields and consider locations that are urban if you are looking for decent returns, and that is almost a market-dynamic independent exercise. So I leave you with this idea, if you could turn a whole market through intervention would it be a good idea? Wouldn’t the truth of ‘values’ be found once the intervention is over? Our market has gone through such a massive adjustment that we are finally at a point where the worst of the worst is over, this patient is likely to recover on their own in good time, so what need is there for any adrenaline?