John A Murphy often advocated nationalising the land but somehow I don’t think he had in mind nationalising the speculative overbuilding of the property bubble. However, barring major accidents, all of us who pay tax in Ireland are about to become part of the biggest landowning cartel in our history since Cromwell took it all to pay off his army.
What have we done? Well, we’ve taken a huge bad debt that would have taken the banks 20 years to work off from retained profits, and we’re going to spend 20 years paying it off instead. If we didn’t, we’d have lost a couple of banks this month, followed by some pension funds next month, and have had to have a slightly different bail out.
Was there an alternative? Well, yes, but none of them were significantly better, or cheaper. Most importantly, the people who should have worked out the alternatives didn’t produce a proper proposal. Apparently, we do not have the capacity to produce policy alternatives at national level. The Greens might well vote for any FG-Labour proposal, if ‘Inda’ and Happy had brought an alternative forward as a bill to the floor of the Dail. The difference might only have saved a few billion, but that would pay for a lot of extra teachers and hospital beds. The government produced a plan, based on guesswork, and no one else bothered to make a serious effort.
But it wasn’t our fault! Well, actually it was – while the bubble lasted, and we knew it was a bubble, we all spent like a Minister on expenses. The math was, and is very simple. If 60,000 people doing the Leaving Cert every year, then sometime in the future when they pair off and set up home, they’ll need about 30,000 houses. For most of the past decade we built over 50,000 houses a year – that’s roughly 200,000 more than we needed, or enough to meet demand for the next 6 years or so without building a single new house. And then we priced those at 2 or 3 times their real value. Until the banks started to fall over, there was no real sign that people were seriously willing to stop. And until it all crashed and burned, no one in the Dept of Finance apparently ever wondered what would happen if we stopped buying houses and cars, so stamp duty and VRT dried up. We are, apparently, a nation of hopelessly gullible optimists.
But at least we’ve got the buildings, right? Yes, for what its worth, which isn’t a whole lot. Since most of those buildings have not yet been energy rated, we don’t know how good they are, but I’m fairly confident that there are not many A or B1 rated houses out there. Everyone knew Home Energy Rating and Carbon Taxes were coming, but not many people bothered to consider how much it was going to cost to heat their €500,000 dream home or how much carbon tax they’d pay on that heating oil.
I don’t believe NAMA will be all done in 10-12 years. I think it will be still be there in 15, and possibly linger on for 20, trying to offload the last few houses and shopping malls. I’m pretty sure it will end up costing us most of the €77bn face value of the loans, because the big secret that no one is drawing attention to is that the ECB will be getting interest on the NAMA bonds. It’s hidden in plain sight, as a clear part of the NAMA scheme. We are going to be paying the ECB €2 or €3bn a year in interest, for the next 15 years.or so. Exactly how much depends on how fast NAMA can offload the property and redeem the bonds, but you can add €30bn to the €47bn without being too far wrong. We’re paying that interest, out of our taxes. That’s our national second mortgage, and we don’t get first time buyers interest relief on it. Think of it as a tax on stupidity.
The fact that bank shares went up on foot on the announcement doesn’t mean much. Those are shares that the banks sold out to the public (including pension funds) long ago. The banks don’t own those shares, and they don’t get any money if they rise. That rise simply means that people think the banks will actually be able to pay out some dividends to people who own the shares. If the banks make significant profits, the Government will just hit them with extra taxes to recoup the loss on NAMA.
The government is waving NAMA around as if it were a magic wand that will end the recession by injecting liquidity into the system and make it possible for banks to lend again. I don’t think that’s going to work. Sure, they’ll have money to lend, but who is going to borrow? People aren’t spending money and very few businesses can see opportunities for expansion. For many small businesses, the choice is between closing now owing money, or close in January owing even more money. Reading between the lines of the shouting match between the banks and ISME, I think the banks have been lending to businesses that have a viable future, but there aren’t many reasonable bets out there. Unless and until we have a decent tourism season next summer, there won’t be much sign of real recovery.
Is there a bright side? well, if what the pundits say about the soccer team doing better when we are broke is right, we can look forward to the World Cup. Meanwhile, if there is anything we should take away from this mess, it is that we need to invest in developing our national intellectual infrastructure in order to conduct some meaning foresight exercises and develop policy alternatives so we don’t get in this mess again. While we are paying off NAMA, we will also face rising energy costs and costs due to environmental changes.
I’ve also been astonished that there has been no real focus on the fact that that the critical measure of the ultimate cost of NAMA depends on our ability to not only recover the acknowledged capital premium (â�¬7bn/15%) that has been paid but that we have to cover the 1.5% (at least) interest we must pay on the total base loan. The claims that all we need is a 1% increase per annum in the value of the portfolio to break even are ridiculous. We’re going to need to find 1.5% per annum (â�¬800m or so) initially just to fund the debt, and that’s taxes that you an I are going to have to pay. And that’s before ECB base interest rates rise (as they surely will) and we find out that we need to cough up 2-3% pa more just to service that â�¬54bn hangover. I’m beginning to think we wont see tax cuts again in my lifetime.
Secondly I’m finally glad to find someone else pointing out that the blame for this needs to be apportioned a lot more widely – the vast majority of the country played their part in driving property prices to crazy levels. Many (if not most) people made unreasonable profits on that behaviour over the years but very few seem to be willing to see that those past “profits” are a fundamental reason why we are all going to be screwed for quite some time. As a non-player in the property market I feel particularly irked by this.
The national unwillingness to consider shifting our property tax regime from being turnover based (stamp duty etc) to an economically sustainable annual tax on the value of the assets horrifies me I have to say. People just cannot see that it is grossly unfair to let people own an asset that has a direct ongoing economic benefit to them without having to pay taxes on it. Had our property tax regime been based on (say) imputed rental income rather than stamp duty the the loss in tax revenue for the government at the moment would be dramatically lower and there would have been a built in brake on irrational exuberance in the first place. Without such a change though we’re going to see a recovery that drives us down exactly the same garden path again.
I’d have one nit pick about your comments on alternatives – there was pretty lively discussion in academic circles ( and the academic “new media” like The Irish Economy ) with plenty of suggestions for alternatives. The problem seems to me to have been that the mainstream media basically accepted that NAMA was the only game in town very early on and went with that.
Your final point is worth a long post on it’s own – there is much talk about the possibilities for extracting a social dividend from the NAMA mess by finally getting our planning and environment strategies into line.I agree but that too will cost, if we apply those constraints to the NAMA operation then we will likely have to accept that it will cost us more in the long term.
Great post though, brightened up my Sunday no end.