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Archive for April 4th, 2010

To many, the energy which Brian Lenihan has mustered to confront the banking crisis in the State is impressive and against a background of his personal fight with a potentially deadly disease, is near miraculous. David McWilliams described in his book “Follow the Money” how he had a midnight visit from the garlic-chomping Minister in September 2008 in the run-up to the blanket bank guarantee – and with a cup of tea in David’s kitchen we get the impression that Brian Lenihan was consulting far and wide and with a seriousness commensurate with the scale of the crisis.

But we must remember that Brian Lenihan wears more than one hat and he often doesn’t have the luxury of which one to don. In today’s Independent he is attributed with saying we’re at the bottom of the residential property market. The single quote I can find to support this conclusion by the Independent is “You can now buy in confidence that the price is realistic.” Whilst the ESRI/Permanent TSB monthly price index has been suspended (the last one for December 2009 showed a fall of 3.6% in that month alone with falls accelerating though in the context of limited sales evidence) and the kicking of the promised public register of prices into the long grass despite calls from the IAVI, CIF and consumers (and despite the assumption that NAMA valuers which include high street estate agents are getting access to the Register anyway in discharging their duties to NAMA), we are blind as to what is happening in the property market.

The median of a poll of pundits in the Irish Times at the start of January 2010 was that there would be a 9% fall in prices in 2010. There are predictions from various people and organisations, some of whom will have vested interests one way or the other. One of the most recent was on 23 March 2010 from Jim Power, economist at Friends First which indicated a further fall of 10% this year following a 50% fall from peak to date. We have had recent “firesales” of property in Mullingar and Roscommon with properties on the market at €70k and above. DAFT.ie, Ireland’s foremost residential property website (by number of properties marketed) has quite a range of properties at well below €100k and it has been suggested that we are near the floor. Morgan Kelly indicated in late 2009 that there was still another 50% to fall from prices then (giving an end result of prices 80% off peak). So it would be fair to say that some think prices are bottoming out whilst others think they have some way to go. For what it is worth the view of namawinelake is that prices have some way to drop yet (10-20%) because of an excess supply (which may have a far less impact than some think) and a marginal population increase together with short-term hits in terms of unemployment, taxes, wages, commodity prices, interest rates and credit supply. Which brings us to our Minister of Finance.

What business does he have telling us that prices are now realistic. What prices is he referring to? On what basis are prices realistic? To whom are they realistic? If prices are realistic does that, as the Independent aver, equate to prices being at the bottom? Maybe but let’s remember that the Minister must also on occasion don the leader’s hat and tell us to cheer up, it will get better and we will rebound and I know that we must believe that. I wonder whether if the Minister donned the realist’s hat he would believe his own words at this point in time. If the Minister had just spent €54bn of the State’s money on gold, I wouldn’t expect him to say anything other than “buy gold today and get as much of the stuff as you can”. Time will tell.

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NAMA now a 15-year project

So we learn at the stroke of a pen or a key at the Independent today who quote Minister of Finance, Brian Lenihan as saying”I understand that, to the general public, the numbers involved are frightening. But I would ask people to bear in mind that the Nama project is set up over a 15-year period and that there will no immediate cost in 2010 to our balance sheet.”

We are still without a “final” business plan for NAMA. We have the draft in October 2009 and Mr Lenihan has repeated on more than one occasion that a business plan will be produced in June or July 2010. Whilst some will have sympathy for the reason given for the delay – NAMA are getting to grips with actual transactions and only then can they assess the finances with any degreee of finality – the reason will not win much sympathy with those who have had to produce business plans where there are significant unknowns.

Are there any other significant changes to NAMA’s character besides the extension of the lifetime to 15 years? Well we do know that Patrick Honohan, the newly-installed Governor of the Central Bank did say on Tuesday last that he thought that NAMA had a “fair shot” of breaking even despite the draft business plan indicating a €5bn profit over 10 years. Also there has been debate over the haircut applied in the first tranche of loans – according to the traditional definition of haircut (1-LEV/Loan value which in October 2009 was 1-54bn/77bn or 30%) the haircut on the first tranche will be 34.5%, not 47%. There has been no conclusive resolution of the mystery of the difference between LEV (€10.5bn) and consideration to be paid (€8.5bn) in respect of the first tranche – attempts at explanations using the EU discounts haven’t proved conclusive.

The one thing we do know about NAMA is that Mr Lenihan has undertaken to come back to the Dail if the cost of the loans exceeds €54bn.  Whilst balancing the need to expedite the resolution of our banking crisis and avoiding getting bogged down with consultation and political machinations with accountability, we would ask the Minister to direct the early publication of the NAMA plan.

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