Archive for May 15th, 2010

Although we call it the National Asset Management Agency, NAMA is in fact dealing with loans where almost a third are in respect of property outside the State. Indeed NAMA is not even an asset management organisation, at least not in the early days where it will be a loan manager – only when loans go bad and foreclosure follows (in what NAMA “prudently” estimated in its October 2009 draft business plan would happen in 20% of cases), only then will NAMA become an asset manager. And lastly it’s arguably not even an agency – it is not subject to the State’s Freedom of Information Act and our Minister for Finance, Brian Lenihan, is forever telling us NAMA is an independent body.

It is the first of these though which NAMA should especially consider in its dealings with governments and people outside the State. As this story in the London Times demonstrates (and look at some of the comments), there is the potential to have NAMA seen as a gang of Irish bankrupting locals, demolishing their property and undermining their property markets through firesales or hoarding. NAMA is lucky to have Brendan McDonagh as its CEO because he comes across as a decent, non-presumptuous, hardworker doing his job with neither airs nor graces – he is also a clear communicator. Of course NAMA will employ third parties in local markets and indeed may have local advisory boards. It is important that NAMA understands the importance of clear communication of its objectives and puts in place plans to deal with the suspicions and sensibilities of locals. If it doesn’t, it risks exposing itself to difficulties in a range of areas including planning decisions, finding investment partners and disposing of assets not to mention hostile judicial reviews and competition-related challenges.


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The disconnect between residential rents and property prices is again highlighted by a report by Irish Mortgage Brokers reported by the Independent today. The report itself is available here.

In essence the report points out that current rent levels would indicate the need for prices to drop another 40% before there was equilibrium between renting and buying (or that there is a corresponding increase in rents to support present asking prices). This fact of Irish property life has been commented on by others including David McWilliams here. I would recommend you take a look at economist Ronan Lyons’ rent-v-buy calculator here to review the finances of any prospective purchase.

Of course, it is not that difficult to understand why rents have gotten out of kilter with property prices. Ireland has had a boom in property prices whereby prices increased by 12% per annum compound between December 1999 and December 2006 (source Permanent TSB/ESRI house price data – spreadsheet available here).


With that level of price appreciation, owners could afford to offer low rents because the increase in property prices was subsidising the bottom line return. However since December 2006 property prices have dropped by 35% nationally. A rational owner would have increased rents to compensate for capital losses. However other events were muddying the usually-clear vision of investors.

Firstly the ECB lending rate was at 3.5% at the end of December 2006 and that has fallen to 1% – lower debt servicing means the owner can absorb some of the fall in capital. However although the headline lending rate remains at an historical low, owners not on tracker mortgages have seen variable rates creep up and will now typically be paying 3-4% interest.


Secondly, the general consensus was that there would be a soft landing. Outspoken economists and commentators who predicted very hard landings were widely ridiculed and ignored. Like a frog placed in cold water gradually brought to the boil, owners have seen so many false dawns where a corner was being turned or where people called the bottom of the market.

Thirdly the demand for rental property may have fallen as emigration returned. From a supply side, a boom in house building (in 2007, Ireland was building half as many houses as the UK, a country with 15 times the population) has left an overhang of vacant property.

Fourthly, the incomes of renters has been squeezed through higher taxes and both private and public sector reductions in gross pay. Unemployment has rocketed to 13.5%.

So the natural reaction of owners which would have been to increase rents to bring property back to a normal yielding investment has been met by market circumstances which won’t support higher rents.

So how might this market (rent and purchase) which has moved so much out of kilter return to equilibrium?

1. Landlords increase rents – I do not have statistics on the control of rental  property in Ireland but I do not believe the State has a small group of landlords owning large amounts of property. The reason I believe this is that the State introduced a Non Principal Private Residence tax in 2009 (€200 per property) and a recent press report using information provided by the Department of the Environment Housing and Local Government states that “In excess of 1,000 owners have paid the charge on more than 10 properties each. One company, or individual, paid the charge on more than 200 units of accommodation”. Anecdotally I believe that much private sector rental property is owned by a large group of unconnected people – the farmer or taxi-driver with one or two rental properties. The point is that I do not believe we have anything approaching a cartel in the rental market that could collectively move prices regardless of demand or price considerations by renters. With these market characteristics I believe it is the more flexible renter who will defend better their position than the property owner, particularly the smallscale landlord who is depending on a month’s rent.

2. Sellers reduce their prices – present estimates of negative equity mortgages in the State are in the 150-200,000 range out of an estimated 800,000 total mortgages and 2,000,000 total properties. If property drops 45% from peak (we have already to the end of March 2010 seen a 35% drop) then that figure has been estimated to increase to 350,000 in negative equity. The average negative equity position has been put at €38-50,000 per household. Ireland generally does not have non-recourse loans so borrowers remain liable of any balance owed to banks after a property is sold. Ireland has draconian bankruptcy law. So it would be fair to say that in some instances sellers can’t reduce prices but they may still place their homes on the market in that hope that “it just takes one buyer”.  Others may be sold regardless of price (executor sales and repossessions for example) but these would be not be on a large scale. Asking prices have come down by 30-40% from the peak according to DAFT.ie. Sellers who own their property without a mortgage and those who are not in negative equity may decide to reduce prices further. Negative equity may become more of a feature in Ireland – presently with less than 25% or mortgages in negative equity we have some way to go before we reach the 70% levels of negative equity in Nevada, Arizona and Florida today. However if negative equity does gain more of a hold then the State may be exposed to the risk of a Japanese-style lost decade where there is little consumer growth in the market with homeowners paying down mortgages on overpriced property and a property market that becomes stagnant at existing price and rental levels.

3. Sellers take their property off the market in anticipation of future price increases and take whatever rent they can achieve to defray their costs. There is much debate as to whether we are at the bottom of the property bust with many predicting that there are further falls in prospect. Our Minister for Finance, who has recently set in train the purchase of €50bn of property-backed loans, believes we are close to the bottom and can now buy with confidence at realistic price levels. However it is a fact that at some point, property will reach its floor and will recover from that floor – the timing and the profile of any recovery are unknowns though. Our economy is set to stop contracting later this year and unemployment is set to start falling next year, our exports are strong and growing, inflation which is uniquely (in a European context) negative in Ireland at present may return with a vengeance if the EU’s €750bn bail-out funds flood markets, emigration may reverse and we do have one of the highest birth rates and lowest death rates in the developed world and government actions and incentives in support of NAMA – all may lead to a near-term bottom and strong recovery. On the other side of the scales, emigration in the short term is anecdotally rocketing (we had net inward migration of 500,000 in the boom years, what might the net outward migration be in the bust), there is an overhang of vacant property, €3bn+ must come out of the State’s budget later this year and our Taoiseach has said that unit labour costs will drop 8% between this year and next (though the Central Bank Governor has called for a 20% reduction), property and water taxes are a possibility, our neighbours in Northern Ireland are considering reducing their corporation tax rate which might mean more competition for MNCs. Each owner will weigh up these and many other considerations when deciding whether to sell or hold.

So will rents rise or property fall? Will rents fall further and will property rise further? We will wait to see. I leave you with what Konrad Adenauer said about the Berlin Wall in 1961 “What is unnatural cannot endure, that is why the wall will come down”. Only time will tell whether it is our property values or rents that are unnatural.

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