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Archive for June 28th, 2012

When the NAMA chairman Frank Daly made a speech last year to the Licensed Vintners Association, there were a few raised eyebrows at why NAMA would be speaking to a small group of pub-owners. This morning, Minister for Finance Michael Noonan was present at an occasion organised by an equally small organisation, Property Industry Ireland, in which Minister Noonan held forth on the state of, and prospects for, the Irish property industry.

The speech is here, there’s nothing really new in it, but there will be a few snippets of interest to the audience on here.

(1) It seems that NAMA is providing up to 75% of purchase prices through its vendor pricing scheme. The Minister said two weeks ago that it was 70%, but that was at odds with NAMA’s own statements on the scheme.

(2) “Banks have stated [presumably to Minister Noonan] that they have significantly increased the number of mortgage approvals given, however, mortgage drawdown remains low. They [the banks] cited two factors for this: In the country – uncertainty about house prices, and inDublin– house prices moving above the expected sale price.” That’s a strange turn of phrase – “house prices moving above the expected sale price” and presumably means that buyers aren’t buying property they think is too expensive.

(3) Under the heading “[Measures to stimulate property market] – [Initiatives]”, Minister Noonan says his “Department is taking a lead role in returning the property market to normal” though little detail is provided

(4) There is an awkwardly worded call for private sector involvement in new construction and development – “Private sector investment is now needed to complement these initiatives by the State and NAMA initiatives, including for instance vendor financing, which can help leverage increased private sector appetite for property-related investment in Ireland.”

(5) Minister Noonan claims that property – presumably both residential and commercial – is competitively priced – “due to the property crisis, property is currently extremely competitive in international terms.” The National Competitiveness Council, in a report published earlier this year, would seem to disagree…

(6) The Minister points out that there are varying vacancy levels across the State, which is true enough, but his conclusion might strike some as odd – “based on these figures, care is needed to ensure that there is a sufficient supply of houses in areas of growing demand such as Dublin, as the last thing we need is a surge in house prices.” It’s as if he is calling for speculative residential development inDublin.

As for Property Industry Ireland, it is not exactly clear what the raison d’etre of this organisation is; it appears similar to the Construction Industry Federation (CIF). The only news item on PII’s website is an article in the Irish Times by Bill Nowlan which begins “Ireland’s economy depends largely on property” Minister Noonan described the group this morning as a “think tank”, though there doesn’t seem to have been much publishing “thinking”since the group was formed a year ago.

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The “nod and a wink” culture that is coming to symbolise Minister for Finance, Michael Noonan’s way of doing business becomes clearer with each passing week. We are today on the final day of a 3-day bondfest with an overall total of  €1.15bn being paid by this nation to unidentified, unsecured, unguaranteed bondholders at what remains of Sean Fitzpatrick’s Anglo Irish Bank and Michael Fingleton’s Irish Nationwide Building Society. The reason for this insolvent State, which is in the middle of an IMF bailout programme, making the payments? According to Minister Noonan last year, it is because “a nod is as good as a wink to a blind man”

Separately, that part of the public which follows these things continues to scratch its head at the deal done between the Government, IBRC and Bank of Ireland, by which BofI is lending €3bn to IBRC for one year at 2.35%. Last week at the BofI EGM, it was confirmed by the BofI CEO Richie Boucher that he was unlikely to see any profit from the loan after taking so-called “credit default insurance” into account; in other words, BofI is insuring its loan to IBRC and once you take the cost of that insurance into account plus the 1% interest BofI must pay the ECB for the cash in the first place, the transaction generates no profit. Why would BofI engage in such business? It’s not clear but you would have to suspect that the “nod and a wink” culture is at play again. The Government has a 15% shareholding in BofI so it doesn’t have majority control, and only two of the 12 directors on the BofI board have been appointed by the Government. Yet BofI engaged in a seemingly, philanthropic act in lending €3bn to IBRC for no profit. No doubt the appointment of Wilbur Ross and Prem Watsa to the BofI board announced just after the EGM, is purely coincidental – both men represent the North American companies which invested in BofI last summer.

BofI is taking over a loan to IBRC that was originally funded by NAMA in March 2012. And you might recall that NAMA was, like BofI, charging 2.35% per annum on its loan which was capped at 90 days. NAMA claimed it was providing the loan on an arms-length commercial basis. It was noteworthy that NAMA failed to issue a press statement for what has been the Agency’s biggest financial transaction to date, and the commentariat was suggesting that the transaction was conducted at Minister Noonan’s behest on terms which were closer to the “nod and a wink” culture than the arms-length basis asserted by NAMA. Earlier this week, in a Dail response to the Sinn Fein finance spokesperson Pearse Doherty, we found out that NAMA, unlike BofI, didn’t even take out credit default insurance. The full exchange is here

Deputy Pearse Doherty: asked the Minister for Finance following on from reports that suggests that, after taking credit default insurance into account, Bank of Ireland will not make any profit on the arrangement whereby it replaces the funding provided by the National Asset Management Agency to the Irish Bank Resolution Corporation in order to satisfy the promissory note commitment that fell due in March 2012, if he will confirm if NAMA made a profit on its part in the arrangement; and the amount spent by NAMA on credit default insurance.  [30418/12]

Minister for Finance, Michael Noonan: I am advised that NAMA did not take out credit default protection against the short-term financing facility. I am also advised that for the duration of the short-term financing facility between NAMA and IBRC, NAMA received a rate of return of 2.35%, which was above its interest cost on its NAMA Senior Bonds. The difference represents the agency’s profit in relation to this transaction.

In relation to Bank of Ireland, as the deputy may be aware I have no role in the day-to-day commercial and operational decisions of the bank, which include these matters. These decisions are taken by the board and management of the institution.”

So apparently NAMA’s view of an arms-length transaction, albeit for up to 90 days, is different to the view of the BofI board.

On a related subject, Minister Noonan is not saying if BofI is using a  related party or indeed one of its principal investors to provide the credit default insurance which will apparently cost €40m approximately for the forthcoming year.

Minister Noonan says “I am not aware of any such announcement. As the Deputy will be aware, risk management policies and actions are a matter for the Management and Board of the Bank of Ireland. I have no role in the day-to-day commercial and operational decisions of the bank, which include these matters. These decisions are taken by the board and management of the institution.”

Just the sort of response we are coming to expect in this flourishing “nod and a wink” culture.

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The Nationwide Building Society has this morning published its UK House Price data for June 2012. The Nationwide tends to be the first of the two UK building societies (the other being the Halifax) to produce house price data each month, it is one of the information sources referenced by NAMA’s Long Term Economic Value Regulation and is the source for the UK Residential key market data at the top of this page.

The Nationwide says that the average price of a UK home is now GBP £165,738 (compared with GBP £166,022 in June 2012 and GBP £162,764 at the end of November 2009 – 30th November, 2009 is the Valuation date chosen by NAMA by reference to which it values the Current Market Values of assets underpinning NAMA loans). Prices in the UK are now 10.9% off the peak of GBP £186,044 in October 2007. Interestingly the average house price at the end of June 2012 being GBP £165,738 (or €207,056 at GBP 1 = EUR 1.25) is 31% above the €157,601 implied by applying the CSO May 2012 index to the PTSB/ESRI peak prices in Ireland. The average home in Northern Ireland in Q1, 2012 was worth €168,347, according to the University of Ulster/Bank of Ireland survey.

With the latest release from Nationwide, UKhouse prices have risen 1.8% since 30th November, 2009, the date chosen by NAMA pursuant to the section 73 of the NAMA Act by reference to which Current Market Values of assets are valued. The NWL Index is now at 816 (because only an estimated 20% of NAMA property in the UK is residential and only 29% of NAMA’s property overall is in the UK, small changes in UK residential have a negligible impact on the index) meaning that average prices of NAMA property must increase by a weighted average of 22.6% for NAMA to breakeven on a gross basis.

According to the UK’s Office for Budget Responsibility which independently monitors and comments on theUK economy, house prices are projected to fall by 0.4% in 2012 before increasing by 0.1% in 2013, 2.5% in 2014 and 4.5% in 2015 and 4.5% also in 2016.  UK inflation has now come down below 3% per annum despite being elevated since the banking crisis in 2007, overall inflation in 2012 is set to stay close to 3%  – remember that UK inflation has increased by over 15% since their peak whereas in Ireland inflation has been subdued and is one third of that – the UK has pumped GBP0.3tn of “quantitative easing” into its GBP1.5tn economy.UK interest rates may increase later this year to combat inflation – the base rate has been 0.5% since February 2009.TheUK economy is projected to grow by an anaemic 0.8% in 2012 in real terms, close to our own Department of Finance’s projection forIreland at 0.7%.

This morning, the Nationwide has also released its Q2, 2012 series which provides a regional breakdown of prices. All regions have declined in real terms in the past 12 months, given inflation of 2.8%. London and the English South East have been top performers. Northern Ireland is bottom of the league.

 

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