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Archive for September 9th, 2012

Ted: I think it might work, Dougal. I know it’ll work. It will work.
Dougal: It won’t work, will it Ted?
Ted: …It won’t, no.
Either Father Ted, or an imagining of the ECB meeting last Thursday which has given us the latest plan

The bond markets went berserk this week with euphoria at the leaking of, and then the confirmation of, the latest ECB plan to deal with the simple facts that banks in Europe are still nursing huge uncrystallised losses and countries are running up deficits and households, businesses and countries have colossal levels of debt, levels which are arguably unsustainable. The ECB is now set to pump “an unlimited quantity” of money into countries and banks around Europe, and the markets love it and you could almost see a “Mission Accomplished” banner scrolling across Bloomberg terminals on Thursday.

But stand back and take a look at what the ECB is doing and you may conclude that not only is the concept underpinning the plan unfeasible, but there are major problems with the technicalities.

The problems with the technicalities are simple –

(1) what are the individual countries’ trigger interest rates that will prompt the ECB to intervene, and since when does the ECB get to decide that the trigger rate for Ireland should be less than Spain’s but greater than Italy’s for example, or will the ECB have a uniform trigger intervention rate, and if so why should it be any greater than Germany’s so-called risk-free rate?
(2) no matter what way you cut it, the ECB will be exposing itself to risk of default when it buys bonds. If there was no such risk, then the interest rates on Irish, Spanish and Italian bonds would be 1%, the same as Germany’s. There is risk, and what happens if the ECB makes a loss. Will Germany as the biggest backer of the ECB carry the bill for a Spanish default?
(3) The ECB says it is not printing new money and its bond buying will be “sterilized” which implies that the ECB will just temporarily print new money to buy bonds but when it sells those bonds it will burn the proceeds. But if the temporary period is years, then what does that do to inflation across the EuroZone? The ECB balance sheet is already at €3tn, what happens to the credibility of the euro and European banking if that balance sheet grows to €6tn or €10tn?
(4) What happens to Greece, whose bond prices were not affected by last week’s announcements?

The problem with the concept is even simpler –

If countries have unsustainable debt and Ireland, Portugal and Italy are already in the 120% debt:GDP zone, and Spain’s trajectory pointing to a similar level, then how does a plan which merely buys debt from a country struggling under the burden of existing debt offer a long term solution? This latest plan from the ECB yet again assumes that the problems of several countries are temporary, and once the global economy lifts, it will take Europe and peripheral European countries with it, and surely that lift can only be a short time away? But measures put in place since 2007 have all been designed to artificially prevent incomes and asset values from falling to their natural level, and losses at banks being crystallized. All this latest plan does is further distort the reality of several countries borrowing costs being naturally at unsustainable levels. Spain’s 10-year rate was touching 7% earlier this week, after the ECB announcement it fell to 5.6% – 7% was the natural level reflecting the worries about the debt of Spanish banks and regions, 5.6% is an artificial rate introduced by the ECB’s plan. Does the ECB plan change the reality financial condition of Spanish banks or regions?

The ultimate ECB plan or European plan has to involve either (a) printing money permanently which will inflate the debt away or (b) focused debt write-down and/or default. The current path is merely a temporary support which both distorts and blights the prospects of countries in difficulty.

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For a media company which is balance-sheet insolvent to the tune of €200m, which reported a comprehensive loss of €177m for the first six months of 2012, which has seen circulation and advertising decline 5-10% in a year and which owes the banks over €400m, you’d have to wonder if the folks at Independent News and Media know anything about the media business, let alone the property business. Today, as we enter into the second of the main activity periods on the property calendar, ignorance doesn’t act as an obstacle as there is an all-out onslaught on our sensibilities with the message memorably given by former Minister for Finance Brian Lenihan in April (2010) – “you can buy now in confidence that the price is realistic”, a comment not uncoincidentally carried back then in the Sindo also.

The “buy now” message was last given by the Sindo on 8th January this year, since which time, property has fallen nationally by 5.8%, by 5.1% in Dublin and 6.7% outside Dublin, according to the CSO. Dublin apartments have declined by 13.4% so far this year. So if you had bought a typical €200,000 apartment in Dublin at the start of the year, perhaps acting on the advice and reporting of the Sindo, you would now be nursing a €26,800 loss (so far, this year)

Today, we have a feature piece from Jerome Reilly on the residential property market which carries extensive quotes from hardly the most reliable of property market commentator – the embattled estate agent – who is still hyping the €400-800,000 house market in south Dublin. Claims are shot out at the rate of a “spray and pray” Uzi, all suggesting a great hive of activity and stable or rising prices. One agent – it really could have been any of them – ambitiously claims “the good thing is that people have realised the bottom has been achieved and they are not going to save another 10 per cent by waiting until next year” On days like this, it is a pity we don’t still have stocks in town squares where we might vent our feelings towards certain estate agents with rotten vegetables and faeces, and not throw them on poor Deputy Peter Mathews’s driveway in Mount Merrion as reported elsewhere today.

The Sindo uses figures on the volume of stamp duty returns in a separate battle-front today, to claim a rise in stamp duty and consequently that the “property market is beginning to pick up”. And “pick up” in the Sindo’s parlance means price rises. The Sindo uses real numbers which show 33,000 stamp duty transactions in the first six months of 2012 compared with 27,000 in 2010. So how are they wrong? Take a look at the actual stamp duty returns for 2002-2011 revealed in figures provided to the Fianna Fail finance spokesperson Michael McGrath just before the Dail summer recess (extract in the table below). The volume of transactions did indeed increase by 15% between 2010 and 2011, the last year for which annual data is available but look at the VALUE . The value fell by more than 50% from €107m to just €50m. So increased stamp duty transactions – which remember, could be a transfer from a husband to a wife or other off-market transaction – don’t in themselves mean prices are “picking up” – in fact the direct opposite appears true.

And finally, we have a puff piece on the health of Ireland’s commercial market – which has declined by 4% in the first six months of 2012 with rents still declining, and where transaction levels by value are below the dire levels of 2011; all this despite the free-for-all in last year’s Budget 2012 where stamp duty was reduced from 6% to 2% and major incentives were provided for the purchase of commercial property and of course property owners were given certainty that this Government would not tinker with Upward Only Rent Review leases. Despite all this, transaction volume is up marginally but VALUE is down on 2012. There is still a dreadful bread-and-butter oversupply of commercial property across the country, and particularly in Dublin. Yes, we might need a couple of  new 100,000 sq ft offices in exceptional cases, but most demand is catered for by a supply which presently has 15-25% vacancy levels.

Ratings agency Moody’s reckons property nationally has 20% further to fall, something disputed by estate agents who, let’s face it, depend on confidence for transactions to take place, and without transactions there isn’t commission or income. That doesn’t mean all estate agents are deceitful scammers trying to lure you into buying a falling knife, agents throughout the country are doing their business, trying to get sellers to set their prices realistically and present properties as best they can to buyers, it’s an honourable business, you just need to be cautious about opinions coming from people whose livelihoods depend on you accepting there is stability or recovery in the market. This is what I believe to be a comprehensive list of forecasts/projections/stabs-in-the-dark for the Irish residential property market nationally.

It would be condescending to suggest to IN&M that it focus on the media business where it is notching up losses that exceed all its Irish competitors combined, but cynics might point out there is a relationship between the media business and the property business and a booming property market in the past has led to super-normal profits in the media business.

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