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Archive for January 9th, 2012

The story of Ireland’s bailout in November 2010 has been partly told in dribs and drabs. Governor of the Central Bank of Ireland, Patrick Honohan said that the Minister for Finance in November 2010, the late Brian Lenihan was “crestfallen” when he learned from the ECB that Ireland couldn’t default even on the unguaranteed debts of the banks. The Governor went on to say that Minister Lenihan was “offered no room” for negotiation on the matter. And in April 2011, Dan O’Brien in a BBC Radio 4 programme referred to a letter sent by the former ECB president, Jean-Claude Trichet on Friday 19th November to Minister Lenihan which set out the ECB position, and which implicitly made demands on Ireland in respect of repaying bondholders as a quid pro quo for the ingoing provision of liquidity to Irish banks – remember to this day, the ECB provides €150bn-odd to Irish banks in loans secured by assets in the banks; the ECB does the same with banks in other countries.

But this letter of 19th November, 2010 aroused interest.

Gavin Sheridan at thestory.ie sent a formal request to the ECB to hand over copies of “any or all communications from the ECB addressed to the Irish Finance Minister (or his direct office) in the month November 2010” This morning he received a response which stated that there were in fact two letters sent by the ECB to Brian Lenihan in November 2010 – the first is seemingly uncontentious and doesn’t refer at all to the imminent bailout. But the second letter dated 19th November 2010 is withheld in the strongest language; it is, according to the ECB, “a strictly confidential communication between the ECB President and Irish Minister of Finance and concerns measures addressing the extraordinarily severe and difficult situation of the Irish financial sector and their repercussions on the integrity of the euro area monetary policy and the stability of the Irish financial sector”, the letter goes on to claim that “disclosure of its content beyond what is described above would undermine the protection of the public interest as regards the monetary policy of the Union (second indent of Article 4(1)(a) of ECB Decision on public access) and as regards the stability of the financial system in a Member State (seventh indent of Article 4(1)(a) of ECB Decision on public access)”

The letter today from the ECB seeks to justify its refusal to disclose the letter by claiming “the ECB must be in a position to convey pertinent and candid messages to European and national authorities in the manner judged to be the most effective to serve the public interest as regards the fulfilment of its mandate. If required and in the best interest of the public also effective informal and confidential communication must be possible and should not be undermined by the prospect of publicity. In this case the confidential communication was aimed at discussing measures conducive to protecting the effectiveness and integrity of the ECB’s monetary policy and fostering an environment that ultimately contributes to restoring confidence among investors in the overall solvency and sustainability of the Irish financial sector and markets which, in turn, is of overriding importance for the smooth conduct of monetary policy”

In 16 days time, Irelandwill hand over €1,250m to bondholders in Anglo Irish Bank (or IBRC as it is now known after merging with the Irish Nationwide Building Society). This is equal to the amount of new taxes in 2012 that were set out in Budget 2012. So on one day, we will pay over all our new taxes to unsecured, unguaranteed bondholders – “speculative investors” as Minister for Finance, Michael Noonan called them in the USA last June – and the reason that Ireland will take this course of action is likely to be contained in that letter of 19th November 2010 which the ECB refuses to publish.

So why can’t the Irish nation be told about any threat made against its ministers or sovereignty? After all we are now 14 months away from 19th November 2010. Surely the sensitivity of any market information that might have pertained so long ago, has now faded. Although Gavin Sheridan intends to appeal the decision, presumably the Department of Finance still has the letter…

UPDATE: 9th January, 2012. Artists impression of ECB threat letter. Unfortunately the ECB is not releasing the original.

(Graphic above produced by Japlandic.com, with other examples of artwork available here)

UPDATE: 22nd January 2012. RTE is reporting that Minister for Transport and Tourism Leo Varadkar has said in respect of the €1.25bn bond that falls due on Wednesday that the Troika has said “we don’t want you to default on these payments, it is your decision ultimately but a bomb will go off; and the bomb will go off in Dublin and not in Frankfurt.”

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As the old Moscow Rules say, once is happenstance, twice is coincidence and three times is enemy action. Yesterday I couldn’t help but notice a striking resemblance in theme in  articles penned by three separate contributors inIreland’s Sunday Independent. All three contributors wrote about the Irish residential property market, which has suffered a crash in the past four years, all of the articles contained factual errors or fuzzy or faulty logic and all three concluded that we were pretty much at the bottom in terms of prices for Irish residential property.

First up, there was this article from Marc Coleman who is generally an economic commentator and has some academic qualifications in that area. There are some major factual errors in the report.

“Far from 300,000 properties being vacant the National Institute for Spatial and Regional Analysis estimates that the number of vacant properties is in the region of 100,000.” The study by the National Institute for Spatial and Regional Analysis is available here, and it is consistent with at least two other academically referenced studies by UCD and economics consultancy, DKM. All conclude that there are in fact 300-350,000 vacant homes in the country but when you deduct holiday homes and allow for homes that are usually vacant in any country and the level of homes that are usually on the market, you are left with 100,000+ which are an overhang, that is, an excess in vacant homes over long terms average vacancies. It is wrong, and in the context of the thrust of the article, misleading to say that NISRA “estimates that the number of vacant properties is in the region of 100,000”

“Against the backdrop of a third of a million population increase — and with statistics indicating about 2.6 persons per household — there is no shortage of demand to mop up this excess” This is based on the population increase between 2006 and 2011. Unfortunately we do not have an annual analysis of the population increase. The CSO publishes annual estimates based on a survey of a sample of households and that is the best we have in terms of annual figures. And the CSO suggests that the period 2006-2011 has a tale of two halves – population was growing strongly in 2006-2008 but then emigration returned. That led to the CSO’s estimate for 2011 being that population grew by just 13,600 in the 12 months to April 2011. There may have been “a third of a million population increase” between 2006-2011 or 65,000 on average a year, but from today it seems as if population growth will be much slower.

“around 40 per cent of the €3bn paid in stamp duty between 2004 and 2007 — around €1.25bn — was paid by homeowners” The Revenue Commissioner stamp duty figures for residential property are here. In  2004, €744.2m was paid on residential property transactions, in 2005 it was €922.3m, in 2006 it was €1,300.8m and in 2007 it was €1012.9m. How Mark gets either €3bn or €1.25bn is beyond my reading of the figures.

But it is not the factual errors but the logic that seems most dangerously faulty. Marc says

“As the latest Central Statistic Office house price index shows, average property prices are now 46 per cent below peak 2007 levels and roughly back to 2002 levels. Have they fallen enough? Could they fall further? Have they fallen too far?  The distressed state of the property market strongly suggests the latter to be the case.”

This doesn’t make sense. If a market is properly functioning it can lead to high or low prices. If a market is distressed or not properly functioning, for example through the absence of credit, it probably means that the market tips downward because of a lack of demand, but even if credit subsequently becomes available, other factors like oversupply, increased cost of holding property with property taxes for example, lower take-home and disposable income and transparency – for example from the House Price Database that is expected to be introduced before mid-2012 – can all act to reduce prices in a functioning market.

“While we need a thorough report to be sure, several indicators suggest that price levels prevailing in the year 2004 — while overvalued in that particular year — are probably now a good benchmark of where the market should settle: even if government forecasts are optimistic, Gross National Product and Gross Domestic Product should this year settle at 2004 and 2005 levels, respectively.  Despite widening spreads with base rates, European Central Bank rate cuts mean that retail mortgage interest rates are broadly similar to 2004 levels. Despite higher unemployment, the level of employment, 1,805,500 persons, is consistent with 2004 levels.”

Marc is suggesting that 2004 was a normal year for Ireland’s property market, and that when we discount the bubble and bust, we will return to price levels that pertained in 2004. But 2004 was before the time when we were building close to 100,000 homes a year, before Irish households became the most indebted in the world, before the return of net outward migration, before banks had massive deleveraging targets and when the country had a debt to GDP of close to 25%.

“Between 2007 highs and current lows there is a sensible mid-point that can be achieved if bank lending resumes and two more policy changes occur: a decisive shift away from tax increases and towards real spending reductions: having risen by 55 per cent between 2004 and 2009 gross current spending needs to fall now by much more than the mere seven per cent envisaged in the Government’s expenditure and reform plans.”

It is hard to see the connection between stabilising house prices on one hand, and cuts to Govt spending on the other. Cuts to Govt spending equal a smaller public sector with the reduction looking for jobs elsewhere in a fairly weak economy, lower wages for public sector workers which will depress demand throughout the economy and act to drive down property prices to match new affordability levels and lower social welfare payments which will do the same, particularly so if property related allowances like rent allowance are reduced.

Secondly we had an article by Maeve Sheehan which trumpets the headline “bottom reached but banks must start to lend”. As you study the article to find out how Maeve arrives at her conclusion, you come away unsatisfied. There is a claim by one estate agent who is selling property at 70% below peak values that “I actually think we are at the bottom”. But the country’s main property index from the CSO suggests we are 46% from the peak, so individual sales at 70% off might be close to the bottom, but that is not where prices are nationally right now. The only other statement I can find in support of the headline is “some analysts have predicted another five per cent drop for 2012” This is an orphaned claim. Ronan Lyons whose recent DAFT.ie report is extensively cited in the article said last week that he thought prices would decline by 60% from the peak, the same DAFT report showed that prices were now down 52.1%; this suggests that prices will drop a further 17% before they reach the bottom (€100,000 property at peak is worth €48,000 now after a 52% decline. If the bottom is at €40,000 representing a 60% decline, then prices will need drop by €8,000 from today’s levels and €8,000 is 17% of €48,000). Separately, as someone who closely watches property price predictions, I know of no projection that I could make fit into a statement “some analysts have predicted another five per cent drop for 2012” – you can see this blog’s compilation of projections from different sources here.  Maeve concludes with “so house prices hurtle towards the bottom and then what?”. Again this rhis runs counter to the evidence from the country’s main index, the CSO monthly residential property series, which says that prices are typically falling 1-2% per month – from current levels, about 0.5-1% from peak levels – in recent months. To get to a 60% decline from peak would take well over a year – hardly “hurtling”.

And lastly we had a couple of articles by chief reporter Daniel McConnell, one which promotes the joys of home ownership despite negative equity and concludes with the upbeat sentiments “we certainly hope that the bottom is here, or near at least.  But the time was right for us to buy. We have no regrets, we are happy and have been lucky.”. The other suggests that up to one in four homes is now bought with cash but that seems to be based on a quote from Edward Carey, the former acting chief executive of the Irish Auctioneers and Valuers Institute and current owner of Property Team Carey Auctioneers who says “I would say a quarter of deals at present are being done in cash”. Fair enough, Edward is an experienced property man, but the most recent figures from the Revenue Commissioners from 2009 show that 94% of transactions were with mortgage finance and only 6% with cash. Daniel also says “the Central Bank is working on the basis of a 55 per cent slippage in house prices between 2007 and 2013, but last week’s reports from both Daft.ie and MyHome.ie show that values have already fallen by roughly that figure” Myhome.ie actually say we’re 43% down from peak which is hardly “roughly” 55%. It’s not clear what is meant by the phrase “the Central Bank is working on the basis”. In its stress testing in March 2011, the Central Bank had a baseline scenario of 55% and an adverse of 60% declines from peak. The implication I took from the Central Bank’s work however was that it had based current prices on the PTSB/ESRI index which was Ireland’s premier index until the CSO index supplanted it in May 2011. And in March 2011, the PTSB/ESRI was saying that prices were just 39% down from peak which implied a further 26% decline to bring to the Central Bank’s baseline scenario (€100,000 at peak meant a price of €61,000 in December 2010 according to the PTSB/ERSI’s decline of 39%; to get from €61,000 to the Central Bank’s baseline scenario of €45,000 there would need be a €16,000 decline which is 26% decline)

I can’t help but remark that if indeed we have reached the bottom of the property market and prices are now stabilising, then that will tend to encourage banks to lend to borrowers without such fear for their security and negative equity; increased lending, and more general confidence on the part of buyers will tend to increase transactional activity; an increase in transactional activity should lead to an increase in property advertising; and an increase in property advertising should help the finances of newspapers. Yesterday about 250,000 people will have bought the Sunday Independent and an average of four people will have read each copy giving an overall estimated readership of 1m. I wonder how many are convinced that we are at the bottom? Of course the Moscow Rules can promote paranoia and it is perfectly possible that all three contributors independently arrived at their conclusions on Irish property. If you want to see a recent extreme –  that shouldn’t be meant as implying inaccuracy or fault – projection of prices, take a look at Cormac Lucey’s projections which suggest we end up at 75% from peak – at least you will see some factually accurate data in support of the projection.

I recommend you read the three caveats here that I suggest should accompany any property price projection from any source. It’s worth repeating that none of us has a crystal ball, that the “market” doesn’t necessarily apply to individual transactions and perhaps, in light of the above reporting, that it is worth bearing in mind the potential for ulterior motivations in those providing predictions.

UPDATE: 2nd March 2012. It seems that Irish News and Media has considered the management accounts for the first two months of 2012 and decided its property advertising revenue needs to recover quickly! Or at least that is one conclusion for the article in today’s Independent Property Plus where error and illogic are the order of the day. First up the error, the Independent says ” Meanwhile investors also appear to be calling the bottom of the Dublin apartment market. While Dublin home prices fell 4pc in January, for the second month in a row, apartment prices rose in the capital — up 2.4pc in January” This is just plain wrong. The CSO index for apartments in Dublin published this week was 52.0 for January 2012 and 53.9 for December 2011. In other words, apartments fell by 3.5% in January 2012 and DIDN’T increase by 2.4% as claimed by the Independent. Elsewhere it is illogic which makes the Independent conclude that buyers are being unrealistic. The newspaper claims “So some cash rich buyers at the top of the market are calling the bottom when it comes to prices for these homes.” in reference to recent purchases on south Dublin city’s most prestigious addresses but there is no support for the conclusion that these buyers are “calling the bottom” other than they are actually buying property. Is everyone who buys a property today “calling the bottom”? Seems so at the Independent. But the real kicker for illogic comes from the citing of the recently published DAFT 2012 consumer perceptions report which showed that 49.9% of prospective buyers polled by DAFT and related websites were intending to pay €125-250,000 for their home. On the other hand 61.5% wanted a 4/5 bedroom detached home. Nationally this is quite possible at present. However the Independent zooms in on the most expensive location in the country and the most desirable in terms of the 15% of DAFT respondents, and says you won’t get a 4/5 bedroom detached home for anything like that in south Dublin city! Seriously, that’s the logic. The Independent concludes with “when it comes to purchasing a home the key decision rests with being able to afford the home of your choice in the location of your choice. One should not decide solely on wishing to boast about how you got your timing right.” Hmmm, and what about a key consideration being “not losing 20% of the value of your home in the next couple of years”? That it seems would deter prospective buyers and consequently might deter sellers and that all-important advertising dollar. And to conclude the Independent takes a swipe at economists – “bargain hunting home buyers are keeping their fingers crossed that prices have further to fall and they are being aided and abetted in this belief by economists who predict such declines”

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