Regardless of the rights or wrongs of NAMA, it is shocking how many commentators have accepted the notion that a 10 percent rise in property prices over the next decade will be sufficient for NAMA to break even. The “logic” is this: we are paying a little over €51 billion upfront for assets thought to be currently worth €47 billion, so a 10 percent rise in the value of the assets will give us our money back. Let’s be as spectacularly optimistic as John Mulcahy, NAMA’s senior property valuer, who (alone?) believes that the property market is at the bottom of its cycle. Would anyone consider it a good deal to lend someone €100 today and have them return €100 in 10 years time? Obviously not. Firstly, with any increase in the general price level, €100 will be worth a lot less to you in a decade. And secondly, you would expect the money to be repaid with interest (especially if you had borrowed it commercially yourself!). Property prices will have to rise by a multiple of 10 percent for NAMA to break even. (Apologies for having to state something that must be so obvious to everyone on this website!)
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This is worth a look (HT Mark Thoma).
Most of the Irish academic economists contributing this site are anti-NAMA in its current form, and Karl Whelan has expressed an interest in giving more balance to the site by generating some pro-NAMA threads. Goldman Sachs’ chief European economist was gracious in allowing me to quote his recent email on Irish bank bailout policies including NAMA (the email was mentioned in today’s newspapers). See below the fold.
One of the things that has been heartening about the current crisis is that the world has not lapsed into wholesale protectionism, as occurred during the 1930s. However, this observation, which is frequently made (including by myself), ignores the fact that it actually took a while before protection really got going after 1929. Smoot-Hawley (passed in June 1930) is not really a counter-example, since this represented the culmination of a process that had been in the works since the Presidential campaign of 1928. Elsewhere, the British only broke with free trade in 1931, and Ireland held out even longer. If the world economy were to keep falling at its 2008-9 pace for 2 or 3 years — a scenario that seems to have been averted (touch wood) — who knows what would happen.
That politicians would in such a scenario find it difficult to hold out against the pressures to which they would be subjected is reinforced by this report on the creeping protectionism which has been occurring around the world. The column uses the word ‘juggernaut’, which is presumably a reference to Richard Baldwin’s point that over the past few decades, free trade has been gathering momentum as it creates new outward-oriented constituencies with a vested interest in maintaining open markets. Historically, this juggernaut has more often operated in reverse — think of the long run effects of the Napoleonic Wars in France or the US, or World War I, or the Great Depression. In these cases, disintegration created new companies selling to internal markets who depended on protection for their future well-being — and thus created a powerful political mechanism for ‘locking in’ disintegration.
I don’t think that the juggernaut, which has been rolling in a free trade direction for decades now, has changed course yet. However, the Baldwin analysis suggests the possibility of ‘tipping points’ which might occur in various (hopefully unlikely) states of the world. Things which would make such states of the world less unlikely include major and persistent increases in unemployment, exchange rate misalignments perceived as conferring ‘unfair’ advantages on particular trading partners, and (especially) a combination of the two.
The presumption that Irish housing demand is somehow underpinned by favourable demographics has always been suspect, but recent data are unambiguousdly negative. The headline pop estimate for April shows population growth at 37,300 on the year. But the QNHS, also published this morning, gives figs for the 15+ population which show that growth ceased last Summer. The last five obs on seasonally adjusted 15+ pop are: Q2 08 – 3520.5; Q3 08 – 3529.5; Q4 08 – 3530.0; Q1 09 – 3529.9; Q2 09 – 3529.5.
Thus the growth over the year in the adult population all took place in the first quarter, and was in any event less than a quarter of the growth in total pop. Children don’t buy houses. The figs imply substantial out-migration of adults, at the rate of about 7 to 8000 per quarter recently.
Today’s release also gives pop estimates for April by age-group. The age groups up to 14 show healthy increases. But the groups 15-19, 20-24 and 25-29 are all falling. The 20-24 group fell, between April 2007 and April 2009, from 347,800 to 304,800, that is, by 12.4% in two years. Difficult to see how estimates of strong underlying flow demand for housing can be sustained.