Few organisations have the CIH's unique perspective of observing UK wide and international housing issues. In recent months the inter-relationship of housing markets has been highlighted with developments in Ireland.
The Republic of Ireland Government has now published details of its proposed resolution to the banking crisis. The plan is dramatic and exposes the tax payer to huge risk, and is described even by its advocates as 'the least-worst solution'. In announcing the establishment of the National Asset Management Agency (or NAMA), the Irish Finance Minister, Brian Lenihan will create a so-called 'bad bank'; capable of buying toxic development and land loans from Irish banks totalling €90 billion, thus freeing up institutions to lend to the 'real economy'. In effect, the Irish taxpayer will become a massive property and land owner; not just in Ireland, North and South, but in Britain and America where Irish investors pursued their interest during the boom.
The proposals follow months of speculation on the government's response to the banking crisis which has stripped international confidence in Irish institutions, and seen a dramatic reduction in credit made available to businesses and households across the country, thus stalling economic recovery. On the one hand the proposals represent a response to the mistakes of the past. Back then (just two years ago) Ireland's doomed love affair was with land and property; the portfolios of major banks were composed almost entirely of land and property loans. When the boom ended, the loans that had appeared secure, were now deeply risky.
However, the NAMA proposals also speak volumes about how Ireland sees its future, and the level of debt it is prepared to place on future generations.
Put bluntly, Ireland's economic future now rests on another land and development boom. The state will buy the loans not at current market value (which would represent a bargain), but at a price reflecting future values. In doing so, the Irish taxpayer is betting on an upturn in development and land prices.
Much debate will be had over the logic of buying toxic loans at above the current market value, and on the practical implications of this decision; who will make the valuation, and the criteria on which they will be based. It does appear nonsensical to apply an approach that would surely be dismissed by a commercial bank. If a bank bought an impaired loan, wouldn't it buy at the lowest possible price? But whichever way the loans are valued, to reduce the risk for the Irish taxpayer in the future, the state has to hope that the actual future value exceeds the price it paid for the loan- it will have to hope for a future development bubble.
Furthermore, this boom cannot simply be in Ireland; for the state to be free from risk, the Irish Government also need to hope for an upturn in Britain. We know the attraction of British property and land to the Irish investor during the Celtic Tiger; in the years between 2002 and 2006 the annual amount of Irish investment in the international commercial property markets surged fivefold from approximately €2 billion to over €10 billion. It is estimated at a quarter of the assets to be managed by NAMA are in Britain; over €20bn worth of land and development in Britain could end up in the ownership of the Irish state. The Irish taxpayer, suddenly, must become a passionate enthusiast for London Olympics; hoping that land and development assets in the area will enable it to recoup some of its investment. Are taxpayers really comfortable making the future economic health of the nation conditional on a property bubble in another country?
The Irish state has become a land and development agent at an industrial scale, and its future is now predicated on a boom. Fintan O'Toole put it well in the Irish Times; it turns Ireland into a 'nation of speculators'. I thought it was speculation that caused all the trouble in the first place. I am having a very strong sense of déjà vu.
Usually the least constructive approach in a crisis is to allocate blame after the event. But if we don't learn lessons from the past we risk making them all over again. It was the existing tax regime that made it so attractive for developers to over extend themselves, and the regulatory regime that allowed banks to accept interest only payments on huge loans for extended periods, enabling developers to keep buying. Government must ensure that future upturns are less volatile, even if it has a vested interest in them.
To its credit, the Irish government is taking determined action. It had to intervene to shore up the reputation of the nation's banks, and kick start lending, for the sake of the economy. And by introducing NAMA it cannot be accused of taking small measures. But there is no guarantee that NAMA will encourage international lenders to look favourably on Ireland once more, or that banks will use their new-look portfolios to lend again. The biggest calamity is that Ireland has pinned its hopes on a return to boom. In every other country in the EU the prevailing opinion is that volatility should be a thing of the past, yet Ireland appears to be rushing headlong into another land and development cycle, having learned nothing from our previous excesses. Is this really the best solution from the brightest and the best in government?
The sooner Irish policy makers realise that even we cannot always depend on luck, the better for everyone.