Government and Nama ‘must share in blame’ for new bubble
The link between politics and property remains as strong as ever as the Government faces into the next election, writes Ronald Quinlan
‘THE last time I was in Dublin, a few months ago, people were talking about the housing market starting to overheat again and people paying crazy prices. People do not seem to have learned from the previous experience, this property craze. Sometimes it just makes more sense to rent.”
That’s what the economist Richard Tol had to say when I asked for his reaction to last Thursday’s report from his former employers at the ESRI predicting house price increases of up to 20pc by 2017.
And while Professor Tol readily admitted the housing market was an area he had never given “great attention” to, he had no hesitation in responding when asked if we should place our faith in the forecasts of the ESRI — an organisation whose independence from Government he questioned as he left its employ in January 2012.
“They’re predicting the future, right? So you would be silly to believe any single number. I don’t know about the track record that the ESRI have for the housing market. I simply don’t know,” he said.
What the Dutch academic does know, however, is just how difficult it is to predict economic growth and property price movements in particular. Compounding that difficulty, according to Professor Tol, are factors that go far beyond the simple laws of supply and demand now driving the surge in house prices being experienced in Dublin and beyond.
Everything from the UK’s future with the EU to the possibility of an all-out war between Russia and Ukraine could render the ESRI’s forecasts “way too optimistic”, Tol said, highlighting quite correctly Ireland’s vulnerability in the face of geopolitical shocks beyond our Government’s control.
But while the potential impact of international events may not resonate with everyone trying to put a roof over their heads in Dublin and its surrounding counties, the rapidly increasing cost of the dwindling number of houses now on the market does.
It’s a crisis that the Government and Nama — an agency which acts upon the direction of the Minister for Finance — should have seen coming, according to Paddy McKillen, the Belfast-born businessman acknowledged across the globe for his expertise as a property investor.
“There’s a crisis that neither they [Nama] nor the Government saw coming. It’s here now. We saw it coming years ago. Where were the Government’s advisors and their economists three years ago when it was clear that this was going to happen?” Mr McKillen told the Sunday Independent when asked to respond to the ESRI’s assessment of the situation in the housing market.
“Think of our children who were 20 in 2008; they’re now turning 26 and they haven’t got a chance of getting on the property ladder because there is zero opportunity of finding a home at a price they can afford. Both the Government and Nama must take their share of the blame for the bubble in prices,” he added.
And while Mr McKillen, who bears the singular distinction of having successfully challenged the transfer of his companies’ loans into Nama in the Supreme Court, believes a “fast track” plan to build homes should be instituted now, he doesn’t have confidence that Nama has the ability to deliver it.
On this, he said: “Name anybody on the Nama board with development experience. How can you carry out a much wanted development plan with zero experience? You have to look at the top of an organisation, right at the top. In Nama’s chairman Frank Daly, you have a Customs & Excise man. In its CEO Brendan McDonagh, you have an accountant. Where’s their experience in either banking or development? These plans have to be led by experience at the top. You cannot have a market-led plan being driven by civil servants with zero experience. That’s the kernel of it.”
Commenting on the relationship between Nama and the developers on its books, Mr McKillen questioned if the agency would be able to use their expertise given the restrictions set down in the Nama Act.
He said: “Developers were drafted into Nama because there was a crisis and they had overborrowed. Once they were in, they were treated like criminals. The borrowers in Nama are the ones who could solve this crisis, but they’re trapped. The Nama Act says they can’t buy their own properties. They’re prohibited from working in their own profession. Nama should be embracing and working with these people because they’re the ones with the knowledge. Nama doesn’t have the professional experience to deal with the crisis we are now facing. They control the land banks and they control the developers but Nama is like a deer in the headlights.”
Referring to the direct impact he believes the Nama Act has had on the property industry and on property prices, he added: “The Nama Act gave Nama wartime powers, the effect of which has now frozen the entire property industry. It’s now driven us to a situation where property price increases are occurring at a rate we haven’t seen since the lead up to 2007, albeit without the banks’ finance. It’s a double whammy of no bank finance and prices going through the roof.”
On the issue of funding for development, the Belfast businessman highlighted the fact that the majority of the finance currently being employed in Dublin was coming from international investors and at high cost.
“Any of the major developments at the minute are being funded in the main by foreign money. The cost of the money coming from international funds is exorbitant. There should be situations where the banks are willing to lend for development. There were maybe 30 banks we could have chosen to fund development six years ago. Now there’s two with Bank of Ireland and AIB and I think both of them are practically prohibited
‘There’s a crisis that neither they [Nama] nor the Government saw coming. It’s here now . . . ’
from lending for what we call the ‘D word’. The country is frozen and the Government is twiddling its fingers wondering what’s happened,” he said.
But where Mr McKillen questioned both Nama and the Government’s capacity to understand and to deal with the growing housing crisis, Fianna Fail leader Micheal Martin expressed his fear that the rebooting of the construction sector will be used as leverage by Taoiseach Enda Kenny in an effort to win the upcoming General Election.
Asked if he believed the approaching election had injected a new sense of urgency in Government when it came to the housing crisis, Mr Martin said: “Of course they’re going to try to leverage this for electoral purposes, but one would have to ask the question: why did we have to get to this stage where people are now homeless? We are dealing with an appalling housing crisis and now in the year before the election, you do get a sense that this Government is rewriting the script and the narrative to get ready for the election. They’re saying ‘we’ll create 50,000 jobs in construction and that’s handy’.
And while Mr Martin acknowledged there was clearly room for growth in the construction sector, he expressed concern that the Government in its construction strategy would now seek to use Nama as part of its “election narrative”.
“I think there’s an increasing politicisation of Nama. Nama should be allowed to act independently of government in accordance with the remit that it was set. It is striking that a government that opposed it, condemned it and criticised it now accept it as an effective intervention and are now participating in announcements in an effort to make the Government look good,” he said.
Referring to the recent publication of Nama’s strategic review and its assessment that it may “dispose of its assets more quickly than originally envisaged”, the Fianna Fail leader said there was now a real sense that the Government wanted to ramp up Nama’s sale of assets without any real reflection of what was best for the taxpayer and the economy.
While it is true that Nama operates according to the Nama Act on the direction of the Minister for Finance, its CEO and chairman would of course contend that the agency is alone responsible for the commercial decisions it makes.
In seeking to redeem all €30.2bn of the senior bonds it drew down from the ECB to acquire developers’ loans from Ireland’s broken banks before its original target date of 2020 however, one would have to ask if Nama’s determination to meet its own bottom line isn’t coming at too high a cost to the rest of us.
Indeed, only last Friday none other than Nick Leeson, the original ‘Rogue Trader’ whose unchecked risk-taking brought down Barings Bank in 1995, fixed Nama firmly in his crosshairs, accusing the agency of selling Cork-based developer Michael O’Flynn “down the river” with its decision to sell his group’s €1.8bn of loans to the US ‘vulture fund’ Blackstone.
Writing on the subject in his blog, Mr Leeson said: “In December 2010, the CEO of Blackstone told an audience that they were ‘waiting to see how beaten up people’s psyches get and where they are willing to sell assets’ and that ‘you want to wait until there’s really blood in the streets’. He was talking about Ireland and, you, the Irish people. Blackstone have already amassed a €2bn portfolio of Irish assets and last week appointed receivers on the single largest borrower in that portfolio, Michael O’Flynn, so quite clearly that time has come.
“Many saw the American funds as white knights riding in to save the day. Unfortunately, this was extremely naïve, an artery has been severed and the blood is pumping. They’re not called vulture funds without reason.”