Hell’s anteaters, but I am tired today. I’ve gotten out of practice at the art of staying out late and expressing emotions.
But I wanted to talk about NAMA‘s new mortgage incentive scheme, and why it’s nuts. For the interested overseas reader I’ll briefly recap: NAMA is a body set up to manage assets, mainly property, of lenders and investors who were bailed out by the State. Put bluntly, it owns a great number of houses that nobody ever needed, or ever will need.
Among them there are some decent saleable properties, they’re just not moving because the property market is moribund. Actually, moribund is a euphemism. The property market is as dead as a dodo with a doornail in it. So NAMA’s idea is to incentivise purchasers with a special mortgage bargain.
They reason that people aren’t buying because they fear house prices have further to fall, trapping them in negative equity. The scheme, which they’ve hammered out with some of our (rescued) lending institutions, is that your repayments will be reduced if the market value of your new house drops. Well, until it drops to 80% of your purchase price; below that the loss is all yours. So it’s sort of an insurance policy against the market falling. A financial derivative, if you will.
But why is NAMA doing this? If the idea is to get the property off state hands because we badly need the money, it’s just robbing Peter to pay Paul. There will be a further drop in house prices – zero doubt about that – and under this scheme the loss is going to be taken by the taxpayer. Again.¹ They say they’re doing it to “kick start” the market, as if the scheme was a sort of financial defibrillator. The image that comes to my mind though is of early electrical experimenters trying to bring corpses back to life.
There is one simple reason why the house market is moribund: The people who need houses can’t afford them. So it’s a market, why don’t prices just come down? Because those who have them, generally speaking, paid far more than they can now get. They’re naturally reluctant to sell at a loss and so hold on to their property in the hope that the market will soon bottom out, maybe even begin rising again.
They are only fooling themselves of course. Prices are still very much higher than pre-boom norms and must come down significantly. The trouble with NAMA’s scheme is that it will only help them fool themselves. If they believe that prices are now only about 20% away from bottoming out, they’re going to sit tight and wait for the rise. That would be the exact opposite of the intended effect.
I think NAMA hope that they’ll fool the buyer more than the seller, encouraging them to believe that we are close to the bottom of the market. That could raise demand to meet prices as they are now, so becoming a self-fulfilling prophecy.
And a hugely counterproductive one, because we need to get house prices down to realistic levels before we can (a) actually afford them, and (b) rebuild a stable, reliable economy. Propping them up at or near their current levels is defying the market, trapping a bubble of false value in the economy – one that will threaten to collapse like an old mineshaft running right beneath our feet. We can’t rebuild on such foundations.
- Well I say the taxpayer. As taxes probably aren’t going to go up much, it’s public services and those who depend on them that will actually take the brunt of it.
- NAMA negative equity mortgage – gimmick or game-changer (namawinelake.wordpress.com)
- Ireland’s Bad Bank Transforms Debtors Into Landlords: Mortgages (teddyoshea.wordpress.com)
- NAMA formally launches negative equity mortgages today (namawinelake.wordpress.com)