Graph of the Week
The Central Bank of Ireland published a report on the Irish residential property market and suggested that homes were presently undervalued by between 12-26%. There’s still no sign of the supporting data despite a request on the day the report was published so the mystery will remain as to how The Economist stated six months ago that our residential property was still over-valued by reference to incomes and rent whereas the Bank says we’re significantly undervalued.
Quote of the Week
“As the Deputy is aware, it is not generally the policy of the Government to interfere in the housing market. Let it find its own level. I am aware of the announcement by the Central Bank. On the banking sector, the general flatness of the indigenous economy and movement in the construction sector generally and the housing market in particular, the Government has reduced stamp duty on all commercial property transfers from 6% to 2%, removed capital gains tax on property held for seven years, raised mortgage interest relief from 15% to 25% for first-time buyers in 2012 which could yield savings of €5,000 per couple and has allowed mortgage interest relief for the next seven years, if residential property is bought in 2012. From speaking to auctioneers, these moves have resulted in some movement but obviously not as strong as one would like.” An Taoiseach Enda Kenny speaking in the Dail on 1st May 2012, again seemingly oblivious to the contradiction in what he’s saying – here, that the Government doesn’t interfere in the housing market and then cataloguing exactly how it is interfering on a scale not seen for almost a decade.
“Where is Northern Ireland and where am I?” one of the dramatis personae in the Sean Quinn saga, a Mr Dmytro Zaitsev who wasn’t impressed when IBRC tried to serve him in Kiev, Ukraine with an Order issued by Belfast’s High Court. Allegedly speaking outside a Kiev court he gave us a taste of the difficulties that IBRC will have in collecting on its loans to Sean Quinn.
Rediscovered (fair-weather?) friendship of the Week
Last July 2011, Minister Noonan announced the establishment of our new Fiscal Advisory Council, an independent economics group which will let us know if the Government is meeting its targets. It will also recommend economic policy and did just that in October 2011 when it recommended the Government front-load the austerity and make a bigger adjustment to the Budget in 2012. The Government acknowledged the recommendation and thanked the Council for it and …. completely ignored it! Fast forward six months and Minister Noonan was speaking to reporters in Brussels during the week about the outcome of the forthcoming Fiscal Compact referendum and according to RTE “he said that if growth or confidence in the economy were lowered by a No vote then the Government would be advised both by the Fiscal Council and the external EU-IMF authorities to “speed up the progress of adjustment”” Seems like the Fiscal Advisory Council might be listened to after all!
Table of the Week
Not a bad auld recession for some at our State-owned banks with confirmation during the week that 22 staff earned over €300,000 last year at AIB/EBS, Permanent TSB and IBRC – it might be more when you add in Irish Life which we 100% own and Bank of Ireland where our shareholding is down to 15%.
Unmasking of the Week
One of the most closely watched lots at Thursday’s Allsop Space auction was Lot 74, an incomplete housing estate in Ballyjamesduff, County Cavan where three houses plus four acres were up for grabs with a maximum reserve of €40,000. After brisk bidding, the lot was sold for €122,500 and Allsop Space report that the buyer was a Northern Ireland builder who wished to remain anonymous. Along came RTE whose news report apparently identifies the bidder above. Reminds you of last year when RTE reported an attack on a Garda informant and broadcast video of the man’s home and personal details including his name whilst at the same time broadcasting a separate report of a missing prisoner who absconded from a hospital and appealed for help with his recapture, with the only information given – “a man in his 20s”.
Word of the Week
“Surreptitious” – speaking of RTE, the investigation by the Broadcasting Authority of Ireland (BAI) into the RTE Prime Time Investigates programme “Mission to Prey” which made serious allegations about a County Galway priest, has now been published. It finds that RTE producer guidelines with respect to surreptitious filming had not been followed; indeed RTE staff claimed that secretly filming the priest from a van parked outside his church and mingling with parents and filming at a Holy Communion did not constitute “surreptitious filming” This is what the Investigating Officer Anne Carragher who was drafted in by the BAI had to say about surreptitious filming of the priest.
NAMA Wine Lake 
Welcome to the bottom.
Any lower and the copper in the walls would have been worth more. This builder—whoever they are—just called time on all the house price propaganda and other official rubbish over the last 3 years. Let’s run the numbers.
These houses were originally selling for €225,000. He’s bought 3 for €122,500 which works out at about €41,000 each. The houses each need kitchens and bathrooms, which for the sake of argument we will generously cost about €20,000 to put in for each house. Therefore, I estimate the worth of each house to be around €61,000, which is around ~27% of the original selling price.
Therefore I say, there has been a ~73% fall in the value of Irish homes from peak to trough.
I would estimate that many of Nama’s properties, especially those outside Dublin, and those which are unfinished, have suffered similar falls. Since Nama paid €30.5 bn for loans which were discounted at an average of ~60% each, the €30.5 bn paid represents ~40% of the peak value. If this has fallen to ~27% of the peak, then Nama’s assets are then worth 30.5*27/40=20.5 bn euro.
So Nama will make around a €10 bn loss if prices stay this low (which they will if the stay in euro austerity land). Nama will make a ~33% loss and need a bailout come 2020.
This is of course less than my own estimate of an 80% loss based on the BoI sale. What can I say.
@OMF, I’ve been saying that for months now. We all arrive at the same conclusion in different ways. But all the signals point to a NAMA loss of between €8 to €10 billion no matter what the spin is.
@omf wstt Agree with you both of course, very different folk coming up with a similar number, interesting.
Funny/educational business story of the week here
http://wp.me/p2pHhA-c
@ OMF,
Not a bad synopsis, however I would like to mention a few points..
A property is only worth what the market is prepared to pay for it. If the market is prepared to pay silly money, then the seller gains as would the Revenue.
On the other hand if the market is only prepared to pay peanuts then that’s what the seller gets… peanuts.
However despite what the market sentiment is, there are costs to building a house, bricks, concrete, windows, slates, doors, wiring up electrics, and of course planning and connection of services costs. Add in legal fees, labour costs and VAT etc etc.
I believe many properties are now selling below the cost of what it takes to build them.
As the population of Ireland is increasing, there will be a acute shortage of suitable housing for people in the future, perhaps 15 years time etc.
However there is another point to perhaps consider…
As austerity continues the personal income taxation will have to increase, services i.e. health and education will have to be reduced.
Perhaps we will reach a point where people will be driven from this country as it will no longer make sense to live here.
The more austerity which is introduced, the more taxation is increased then the likely hood of people remaining in the country will decrease.
I would consider buying property now to be risky, considering the fact that there might be nobody left living in the country in 25 years time.
@Sporthog. You are so right! And the exodus has already started.
Selling prices are now below replacement cost. I wonder what will eventually have to give? The cost of building materials has not come down significantly and the wage rates of many types of construction labour (plumbing, carpentry, electrical, blocklaying, etc.) are protected by national agreements. I remember a Director of McNamara’s telling me in the months before their NAMA liquidation that all their managerial staff had taken very significant wage cuts but he could not bring a cleaner on to a building site for less than €16 per hour. Whole firms of architects, engineers, and quantity surveyors are being wiped out regularly and those that survive have laid off staff with remaining staff taking very significant pay cuts. The tender prices I am seeing for such professional services can only mean that these guys are working for below the minimum wage. At the same time, costs for public liability and professional indemnity insurance have not come down nor have operating costs (rents, services, other overheads). The Public Sector insists that all contractors – even ones doing small c. €20k jobs – must be members of the CWPS (Construction Workers Pension Scheme) and that is another significant overhead. I don’t imagine legal or audit fees have come down much either for either professional services firms or contractors.
Does anyone know of an example of this in any other country, i.e. where sales prices are below replacement cost? How long can that continue? How has the situation eventually resolved itself? Falling construction prices or rising sales prices?
@Bunbury, according to the Department of Finance/CSO – March 2012 monthly economic report – construction hourly earnings fell 11.8% in the year to 31st December 2011. I haven’t seen SCSI’s latest rebuilding costs for 2012 but last year’s figures indicated that the Republic of Ireland was still almost twice as expensive as Northern Ireland for construction costs. Maybe that’s how the Northern Ireland builder can make financial sense of his purchase in Ballyjamesduff.
@ NWL There has been consistent evidence of SW and tax fraud in relation to cross border sub-contractors. For example, workers signing on in the North and receiving a wage on this side. Also there is an ongoing problem in getting them to pay tax and social insurance deducted from employees due to this State. Additionally as the employees’ normal base is say in Newry and the job is in Drogheda, a large proportion of the net wage is paid by way of tax free expenses. It is easy to under cut local contractors.
The level of cross border SW co-operation has increased under the current Minister for Social Protection here, which should even the playing field somewhat.
@bunbury, Under normal circumstances (where the market is allowed to find its own level) it doesn’t last too long. The empty properties get bought up, usually by inward investment and sometimes in bulk. These set a new base level, until there is no further supply. Demand then kicks in and the prices pick up, generating new construction activity.
The problem is that NAMA is supporting and controlling the market, stifling supply and not allowing the market to bottom. It can’t last, but it prolonging the depression.
It’s Darwin,thinning of the herd.Good news is the strong survive and thrive.
back in 2009 Gurdgiev and myself suggested in the Sunday Times that inclusive of bank capitalisation and NAMA the total cost could be between 20-40b. 63b down the banks and NAMA looking submerged as discussed, wow were we ever optimistic (not a charge often levied at either of us)