Wednesday, 28 October 2009

Cash for Crap Houses: Ireland & NAMA

Stephen Kinsella: Ronan Lyons has the story on the idea that NAMA should become a hands-on property management company. Long story short, it is a very bad idea. But you knew that.

Allow me to be very cynical for a moment and, just as a thought experiment, assume NAMA does become such a property management company, because of political and regulatory capture, say. I'd value everyone's comments on this, simply because I'm worried a version of this idea is in the backs of minds of a set of vested interests.

NAMA will obtain houses in targeted regions all over Ireland, specifically the areas where the boom went last, and then bulldoze them, collapsing supply back to, say, 2002 levels. NAMA can also use some of the newly constructed dwellings for social housing and amenity projects.

NAMA can then offer current homeowners a twenty percent rebate for the building of new homes, or a straight cash for crap houses swop, where we upgrade the housing stock for everyone overnight, so someone in an uninsulated bungalow can get a brand-new house for, literally, nothing. NAMA can bulldoze the old house to further restrict supply.

This would help boost the construction and associated industries, create job growth and allow for legions of people to get back on an artificially constructed 'property ladder'.

Someone please tell me I'm wrong about all this. I'm sure I've missed a step somewhere along the way.


Nat O`Connor said...

The housing 'market' is always strongly affected by the state's role anyway, because it is heavily involved in so many ways; e.g. the state contributes towards half of all rent in the private rented sector, the state (through local authorities) owns 118,000 dwellings and now flats are to be open to tenant-purchase for the first time, the state sets stamp duty and other taxes on housing, etc.

So, there is nothing new in the fact that the state has huge influence on house prices, supply and demand, etc.

If, as you and Ronan Lyons suggest, NAMA agrees to take on some properties upon which loans were secured, this should not be unexpected. NAMA would be in the same position as the banks are in when they foreclose on mortgages. Presumably NAMA (as a bank) will need the in-house competence to foreclose on loans and dispose of assets, in whatever is the normal way for a bank to do so.

Although there is little 'normal' about the current situation, there is no reason for NAMA to foreclose on all loans simultaneously and then run a property empire. We are more likely to see NAMA foreclose on the least well performing loans and then begin a process of dealing with a property portfolio. Again, I'm not sure what a bank would normally do, but there are options: sell the property on the open market; sell a set of properties to an asset management firm in order to get the loan off the balance sheets; etc.

Nat O`Connor said...

At this point, rather than sell into a flooded market, the state-run entity NAMA may 'sell' the assets to another state body. This would most likely be the local authorities, or it could be some kind of national property agency. This would take care of the bad loan, and this could represent good value for the state in acquiring social housing. The only problem is that this will shift the state's debt from NAMA (off the books) into standard voted capital expenditure (on the books, and in danger of breaking the eurozone rules). But then again I'm really not sure that the EU will let Ireland run NAMA as a long-term property management agency funded with off-the-books capital expenditure.

Likewise, it seems likely that NAMA cannot rent properties in competition with private landlords without coming afoul of the EU state aid rules.

However, social housing is not affected by EU state aid rules in the same way. So, if NAMA were to 'sell' to the state it could save us c.480 million per year currently paid to private landlords as rent supplement.

As for over-paying developers, NAMA will either own a loan or it will own the asset the loan was secured on. So if NAMA over-values the loan then it de facto over-values the asset the loan is secured on. In that sense, developers could be let off the hook if NAMA accepts an over-valued asset in order to write off their loans. But isn't this the same over-valuation, not a second one as Ronan Lyons suggests?

And then we are back to the valuation question again. There is no way on earth that we should pay as much as it looks like we are going to pay for the loans that will be transferred to NAMA, because to do so will over-value the asset these loans are secured on, which makes it in our national interest to have another housing bubble. Except, even as that bubble makes NAMA break even, it simply breaks the backs of everyone paying mortgages and rent.

Likewise, the only thing that makes it logical for NAMA to 'sell' property to the state is that it gets a real discount compared to what it would cost to buy or build social housing today. And the current discount may not do that.

We are just coming out of an incredible scenario, where the number of properties built in Ireland increased massively, and yet so did prices. This defies conventional market logic, which suggests that a surge in supply would create a buyers market and lower prices. It didn't happen. Largely because the housing system doesn't function as a 'market' when you include all the state involvement. So, it is hard to predict what might happen if NAMA does accept property assets (in Ireland) to write off loans.

I discuss the possibility of NAMA increasing house prices at the start of this blog. Likewise, An Saoi previously pointed out the link between NAMA and another bubble.

There are 56,000 households on the social housing waiting lists and there is much talk of a 'social dividend' from NAMA, such as here. This could work, but it requires a major rethink about national housing policy, above and beyond NAMA.

Stephen Kinsella said...

Hi Nat,

I think you're right, the mechanics (not to mention the cost) are daunting, and any movement by NAMA into the housing markets on an active basis would have all the effects Ronan describes and more--but if it accomplishes social goals like creating affordable housing, then perhaps we need to think carefully about its implications.

Damian Tobin said...

Nat and Stephen – There seems no end to the parallels between banking and housing - both were to a large extent left to the functioning of the free market with the implicit assumption that market failures would be self-correcting. The consequences in banking have been serious - but those in housing are equally if not more serious but often overlooked.

It is one of the major anomalies of the past decade that the free market did not solve housing shortage despite record levels of house building. The direct state provision of public houses declined to be replaced by indirect provision through subsidies and the voluntary sector. While this may well have represented an Irish “third-way” it is clear that the consequences were almost parallel to those in Britain. Because homelessness is unacceptable (though still present) in modern democracies, there is an obligation on states to provide a decent level of housing for citizens either through direct provision, subsidies or the voluntary sector. In Ireland it seems that policy markets naively believed that this could be solved through private provision and the free market. The waiting lists for social housing clearly indicate that markets if left unchecked do not achieve this.

If housing has to be diverted from NAMA to social housing, then it is nothing but the monetisation of another cost of free markets!