NAMA explained to NYT/IHT readers

Margaret Doyle provides an analysis of NAMA for NYT/IHT readers: you can read it here.

19 replies on “NAMA explained to NYT/IHT readers”

A very balanced article. I like the declaration of interest. Should be mandatory for all. The Mountjoy Square analogy is instructive.

The mountjoy square analogy is very interesting.
If you told people that at one point houses in Ireland were selling for 8% of what thet were worth 60 years previous people would not believe you.

It gets you thinkin that by far the most important history that children should be thought is the one they are thought least. Financial History.
Perhaps populations wouldnt keep repeating finincial errors if similar errors were drilled in at an early age.
But perhaps I am the one being ‘fanciful’ now.

Are these house prices nominal or real? We have to remember that the 19th century, unlike the 20th and early 21st, had alternating periods of inflation and deflation and the sum total was very near zero. The 20th was a totally different animal thanks to FRB.

The moral of the data is that there is no a priori reason to think that real house prices should trend up. Put that in your NAMA formuala.

The Act of Union was a political catastrophe that caused the entire Ascendancy to decamp to Britain; the equivalent, I guess, of Ireland’s middle-class abandoning the leafy suburbs of Dublin overnight. By the end of the Great Famine, the great Georgian townhouses of Dublin were already well along the road to becoming the slum pits of Europe. Things are bad, but not quite that bad!

The question of a base level inflated value for houses is discussed today by Fintan O’Toole,
I personally think the challenge of estimating a value is not too difficult – simply put the average value is approx 80% of 3times the average wage. It was the negligent departure of banks and building societies from this simple relationship that inflated the bubble. This should be the basis for NAMA valuations of residential properties. Also, since average incomes are following the real house price trend should track.

Economic Models Matter

Why did so many economists miss the severity of the present economic crisis? Why might we believe those same economists with an unchanged view or economic model to predict the future?

Some economists did predict an approaching economic crisis. One of these was Professor Steve Keen is an Associate Professor in Economics and Finance the University of Western Sydney. He is very critical of conventional economic theory. He has written a book “Debunking Economics”, 2001 which, as you might expect, is highly critical of mainstream economic theory. He argues for economic theory which is aware of time and the central role of credit/debt. He is particularly critical of the “Efficient Markets Hypothesis”, which still dominates academic thinking about finance. Since 1995, his main research focus has been the development of an alternative, empirically grounded theory, known as the “Financial Instability Hypothesis”, which argues that finance markets are inherently unstable. He has a blog called Steve Keen’s Debtwatch at .

His recent short (19 mins) presentation at the Whitlam Institute in Sydney is a useful introduction to his analysis of the present crisis.

While looking at the video remember that the private sector debt to GDP ratio was 237% last year in Ireland. (Private Sector Credit Outstanding was €429bn and GDP was €181bn).

Any comments?

@Frank, with all due respect, ‘personal’ methods of valuation are what got us into this mess. While your chosen method does have intuitive appeal it could still lead us up the garden path. But it is infinitely superior to the methods still being employed by ‘professionals’.
A valuer, employed by a large Irish bank, was asked, last week, how he did his analysis. In response to the question, ‘do you compare Irish rental yields with international counterparts or do you compare rents per square meter, or both?’ the valuer said:’You must realise that we do this differently in Ireland. We just look at the most recent transaction for comparable properties. And when we don’t have comparable transactions, as in the current set of circumstances, we set the value at the asking price’.
Go figure.
Property valuations can only be based on sustainable rental yields. At best, Dublin rental yields are currently 4% (but rents are falling, so this is not a sustainable yield). Some argue the ‘right’ yield is 7%. Let’s say it is 5%. That means, by arithmetic, that Dublin house prices have a further 25% to fall – at least.

“We just look at the most recent transaction for comparable properties. And when we don’t have comparable transactions, as in the current set of circumstances, we set the value at the asking price’.”

This is exactly what happened with retail rent reviews in Ireland. They found a few examples of retailers prepared to pay higher rents (usually new entrants who didn’t have a clue) and used that as their benchmark. A discount would be applied for location, but not much.

So when Dundrum Shopping centre opened the rents were astronomical but they became the new benchmark discounted for location. When you went to arbitration the arbitrator was from the real estate industry so you couldn’t win.

Turnover was ignored, profitability was ignored – you couldn’t even introduce it as evidence of a declining business in a bypassed shopping centre.

There has to be a new starting point and it needs to be realistic.

“I personally think the challenge of estimating a value is not too difficult”

That is still an estimate, and still probably overvalues property in our present situation. The government are terrified that the real value will become known, hence the High court, Supreme Court, High Court circus, whicj I promise you will go on until the Carroll group is somehow inveigled under the Nama umbrella.
A telling comment was when Brian Lenihan was asked a few weeks ago what effect the receivership of Zoe group have on Nama and he said “none”. The answer should have been “it will give the government an ideal yardstick to judge the real market value of property” .

They don’t want to know, and they don’t want us to know. so that they can go ahead supporting their cronies.

Fintan O’Tooles article was excellent and cut straight to the point.
Nama either works or doesn’t work – either way we are on a loser. It can work only if we inflate another property bubble. That is insane.
I liked his passing swipe at the regulator.

@Aidan C, christy
Weren’t all the economists who predicted the crises laballed as cranks. Perhaps they should all have taken Bertie’s advice and committed suicide?
Very interesting vid

@ Con

“Once median home prices go much higher than this, as happened in Ireland, it seems to act as a drag on growth.”

But our current financial model seems to be based on the idea that increasing debt (and therefore liquidity) increases growth.

Couldnt it be argued that most of the growth we had since 2001 was related highly to the increase in individual and corporate debt released by the banks and that the realisation that we cannot pay that debt has caused a credit crunch and resulted in governments resorting to increasing Public debt (quantitive easing and increasing national debt)?

@Eamon Moran

“Couldnt it be argued that most of the growth we had since 2001 was related highly to the increase in individual and corporate debt released by the banks..”

Totally agree and the problem now is that this kind of growth cannot be resurrected without taking on further debt. Even if NAMA takes €90bn of debt out of the banking system the highly indebted 25-40 year old will not readily take on high levels of debt (nor should they) to kick start the economy again in the next year or two. If anything it is these people who should be helped with their burden of debt, not the banks.

Eamonn Moran
You are no moron! That is why Paul Krugman lost the debate with Niall Ferguson. As OilisMastery says, history trumps science. This has all happened before and we can read about the various stages. Even George Ure realized only recently that he had misaligned comparison charts of the S&P (?) for the 30s and now.
Don’t look now but they actually foresaw this in the states, and kept it quiet, allowing the housing bubble to create new opportunities to make money out of the ignorant who relied on economisits to protect them …..

Make no mistake, many have exited the market for assets at the right time and “made” money out of selling to a sucker. They could see what was happening.

And it is going to get worse! If you can find someone to buy the house, do so even now. You will be able to buy it back and have 20-30% in your pocket. Interesting times!

@Aidan C

Thanks for pointing to Professor Steve Keen. I had previously not read him & have now started.

His writings about Ponzi Loans were very interesting, I’m now wondering of how much is tied up in Ponzi Loans from Irish banks.

The definition I could find of Ponzi Loan below:
“Ponzi Loans are loans that can only be repaid by either taking out
a larger subsequent loan, or by selling the asset that was financed
using the loan.”

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