Ronan Lyons | Personal Website
Ronan Lyons | Personal Website

Another look at yields on Irish property, for the benefit of NAMA

NAMA’s draft business plan has been released and is available to read on the Department of Finance’s website. For those who had hoped to shape this behemoth for the better, before it got to a point where it became far too difficult to change, it makes grim reading. For example, the entire impact of all the analyses showing potential flaws with the long-term economic value (I have two modest examples here and here) was zero. The estimate of long-term economic value is explained just as before:

It is estimated, based on the application of statutory adjustment factors, that the consideration to be paid to participating institutions will be €54 billion, the estimated long-term economic value of the eligible assets. This will result in an uplift of approximately 15% on the current market value of the collateral of loans identified for transfer, equivalent to a discount of 30% on their loan book value.

I guess what makes it even more confusing is that it’s not that those behind NAMA haven’t been interested in talking to stakeholders. The document lists a long set of “interested third parties” with which NAMA has had discussions, including:

  • foreign-owned financial institutions which operate and lend in the Irish property market
  • the Irish Bankers Federation
  • the Irish Bank Officials Association
  • the Irish Congress of Trade Unions
  • the Construction Industry Federation
  • the Irish Property Council
  • individuals and organisations who have operated and worked with asset management structures (similar to NAMA) the UK Treasury
  • the Bank of England
  • the UK Financial Services Authority
  • the Central Statistics Office
  • Eurostat
  • the European Commission’s DG Competition

You’ll notice that on that long list, there are three glaring omissions: (1) any economists, not that they have the final answer but that they may be able to give you a relatively analytical perspective; (2) anyone with any sort of objective view or analysis of the Irish property market and; most gallingly, (3) any sort of representative of the Irish taxpayer, who’ll be paying for this.

I don’t propose to go through the nitty gritty of the plan in detail. Fortunately, that public service has already been provided by Karl Whelan in a series of posts on the Irish economy site, including parts one, two and three. The one sentence summary might read:

What this draft plan means is that the developers who owe us €77 billion have just been told that we have no plans to recoup this money any time soon.

Instead, what I want to do here is just post one graph: the yield on the most common property size in Ireland (i.e. the mode, the median and the one closest to mean): three-bedroom properties. As a quick explanation, NAMA assumes that yields on Irish property are high relative to their long-term historical (and European counterpart) averages – about 6% – and therefore that property prices will rise, to correct this yield overshooting. Leaving aside, for the moment, that yields can correct through rents falling, rather than prices rising, here’s the picture for what kind of yield you can get in 16 regional markets around the country.

Yields on 3-bedroom properties, by region, 2006-2009
Yields on 3-bedroom properties, by region, 2006-2009

The “level assumed” refers to the level the NAMA wants us to return to. Where yields are too low (clearly the case), property prices must fall – proportionately more than rents, if rents are falling too (which they are), to get the yield to rise. Blue lines are Dublin, brown lines are other cities, and green lines are other parts of the country. The thick red line is the national average. It rose slightly in the two years to 2008 Q3 but has been steady since, as house prices and yields have fallen at about the same rate.

If anyone out there understands what’s going on with NAMA better than I do, can they tell us where the provision in NAMA is for this?

  • Greg ,

    Tut tut.

    You’re being negative.

    Lord O’Brien of Monaco won’t like it.

    • Greg ,

      Is the source publicly available?

      While residential yields are not the whole story it seems to me that rents will fall further followed by falls in residential values.

      Buy to let mortgagors will be forced to sell.

      On the commercial side the only thing that’s holding rents up are upward only rent reviews which I think will result in business failure > empty properties > falling values > distressed sales.

      The market cannot be manipulated for ever.

      • Greg ,

        Ronan,

        Do you have anything which tracks the median wage against house prices over the last twenty years or so? An affordability index?

        Also something tracking bank base rates against house prices?

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