When the NAMA Project was announced, Peter Bacon discussed the pricing process as follows on Morning Ireland:
Peter Bacon: It will be set by reference to the market. The market, as you know, has fallen dramatically. And I think people have overestimated the difficulties in estimating what these market values are.
John Murray: At the moment there is no market.
Peter Bacon: Well, there is a market.
John Murray: Nothing is selling.
Peter Bacon: For example, in the residential sector, you have monthly indices telling us how house prices have fallen by 1.4% to whatever level. We have information about yields on commercial properties moving out to 8%. I think a lot of people are saying “well, there’s no market” but really what they’re saying is “we don’t like the answer that’s there.”
Mr Bacon would not be drawn on the mechanism for calculating the level of the writedown, which, he said, was “market sensitive, and sensitive to the dialogue that has to occur between the government and the individual banks”.
But he said it was wrong to suggest there was no market price, even though there were few transactions. “The peak-to-trough valuations in Dublin, Fermoy or Longford are not hugely different – somewhere in the range of 50 to 80 per cent. If you use 50 per cent and assume certain loan-to-value ratios, and that everything wasn’t done at the peak . . . you come back with a ballpark figure.”
However, when writing about Bacon’s Morning Ireland comments, I also said that I still wasn’t optimistic that this approach would actually be taken. And now, sure enough, today’s Irish Times reports that interim NAMA chief, Brendan McDonagh, has been talking about the need to follow EU Guidelines for pricing of assets “in the absence of market value” according to “longer-term economic value”.
Here are these EU “guidelines”—they contain no concrete guidance whatsoever on pricing assets. Instead, they contain vague recommendations like the following (from page 10):
As a first stage, assets should be valued on the basis of their current market value, whenever possible … As a second stage, the value attributed to impaired assets in the context of an asset relief program (the ‘transfer value’) will inevitably be above current market prices in order to achieve the relief effect. To ensure consistency in the assessment of the compatibility of aid, the Commission would consider a transfer value reflecting the underlying long-term economic value (the ‘real economic value’) of the assets, on the basis of underlying cash flows and broader time horizons, an acceptable benchmark.
Note the curious nature of these recommendations. We should use market prices where we can. But when we can’t find market prices, we need to pay something that will be above current market prices (how would we know?)
What are these “longer-term economic values”? We just don’t know. We can rely on markets to provide us with prices that investors are willing to pay for assets and that’s all we can be sure of. Sometimes one can argue that the prices are too high or too low by appealing to “fundamentals” but, trust me, very few financial economists have ever gotten rich based on their fundamentals-based hunches.
If the argument here is that the Irish government are confident that current market prices for development projects are below their “long-term economic value”, let me outline some reasons to be less confident:
- There are good reasons to expect that even after recovery, we will never return to the rates of growth seen prior to 2008. The slides from my talk at last week’s TCD event provide evidence.
- Even if labour force participation and unemployment rates return to their 2007 levels, we will face higher tax rates than 2007 levels for very many years, thus reducing people’s abilities to pay rents and mortgages.
- There is an enormous excess supply of properties that will take years to work off.
- Tighter financial regulation will rule out a return to the high LTV loans of recent years and funding of speculative property projects will be particularly closely monitored.
- A less competitive mortgage market will most likely mean higher interest rates on average.
- Property mania is probably gone for many years to come and future investors will probably look for higher average yields on commercial property investments.
In light of all this, can we really be sure that taking an over-market-value punt on a bunch of development properties is really going to pay off? And what business of any government’s is it to be engaged in this kind of speculative activity with the taxpayer’s money?