The Sunday Independent is certainly keeping its eye on all things NAMA today with banker Peter Mathews putting some flesh on the bones on how NAMA might be reversed, an opinion poll in which nearly 90% of texters give NAMA the thumbs down (though does the fact that only 7,000 texted an opinion compared with 25,000 last week responding to a survey on closing Anglo – does this indicate that 18,000 haven’t made up their minds yet?), a survey in which 73% of business owners believe NAMA will make a loss and a summing up piece on NAMA which is noteworthy for revealing that litigating Paddy McKillen’s Top 10 NAMA developer place has been assumed by Joe, Peter and Michael Cosgrave and their vehicle the Cosgrave Property Group (no bad thing as far as I can see, one of their prize assets is an acre on Oxford Street in London that was certainly hyper-performing as a retail area the last time I looked).
As it’s a Sunday, I am put in mind of how the concept of NAMA was described to me in the middle of last year. In economic terms NAMA was supposed to take distressed asset loans from the banks, pay the banks a premium for them that the banks couldn’t expect in the present market and NAMA to hold onto the assets until the market improved, leaving the banks with clean balance sheets capable of restoring credit. It was, I was told, like that story of the man walking on the beach of life with God at his side and in the sand was visible two sets of footprints except at difficult times in the man’s life when there was only one set of prints, the story being that at those times God carried the man. Well NAMA was supposed to carry the distressed property market until it recovered and normalised, and although the banks took heavy losses they were at least being paid 15% more than the loans were worth.
A potentially fatal flaw in the NAMA concept though is that although the property market in 2009 was indeed distressed relative to say, 2004-2007, it has become even more distressed since then and the immediate outlook is not at all good. Since 30th November, 2009, the date chosen by NAMA by reference to which it is valuing all loans (including those that are being transferred now and indeed those that may only be transferred in February 2011), both the residential and commercial property markets are down by nearly 10%. Whilst the Permanent TSB quarterly house price index released this week showed only a modest decline in prices in Q2, 2010 (1.7% nationally) no commentator of note, bar perhaps Deputy Frank Fahey, seems to be predicting anything other than continuing falls. The latest commercial index released this week showed that commercial capital values are falling and at an increased pace. The benchmark EU stress test scenario indicates that property will fall by twice the H2,2010 actual falls. Interestingly, Eurostat only accepted NAMA bonds avoiding being placed on the national debt because the government robustly argued we were at the bottom of the bust in late 2009.
Property will of course get back to its 2009 levels plus 15% at some point in nominal terms though given the EU target of keeping inflation below 2% per annum, it mightn’t be wise to depend on inflation to lift prices any time soon. Getting back there in real terms is more doubtful. This week saw a slew of information releases which would not help residential prices at least – mortgages are becoming more expensive and harder to obtain, our population grew by 6,000 in 2009, the lowest increase since 1991, our housing completions will be perhaps 12,000 in 2010 and 10,000 in 2011, 600 repossession applications were made last month, and NIRSA reminded us in their latest working paper that there is still a considerable overhang of unsold property. The only positive news last week was that the Central Bank is predicting growth in GDP this year reversing all other previous predictions which were for a decline – I was surprised the forecast didn’t receive more coverage. However what all of this is indicating is that property will not get back to its 2009 level for some time yet. NAMA does not have an infinite time horizon and remember it is paying for ECB bonds and subordinated debt not to mention operating expense and would appear to have limited loans performing to offset that interest. NAMA is also being pressed by the IMF and others to reduce debt and dispose of property.
So the very principle of NAMA is now to be questioned (if NAMA is to maintain its November 2009 Valuation Date). It is like the religious story except part way along the beach the two sets of footprints become one and they haven’t yet reverted to two again. And the question is whether prices can recover before NAMA runs out of beach.