Wednesday, 23 November 2011
Topical Issue Debate
I very much welcome the opportunity to raise this concern which I share with many others, namely, the proposal by NAMA to sell 750 houses at terms which give buyers, in effect, a 20% discount.
I appreciate that the scheme is dressed up as one which offers insurance to buyers against a fall in the value of the property in the five-year period subsequent to the sale, but the reality is that by deferring 20% of the market price it acts as a subsidy because the down side risk of any house purchase nowadays is factored into the market price. That is the whole problem with the housing market at the moment, and one of the reasons it has not bottomed out.
I have a number of concerns on this issue. The first is that it exposes the taxpayer to further risk. The taxpayer who paid to buy the original loan on the asset is now being asked to subsidise the sale of the asset as well.
The argument that the sale would generate VAT revenue and that the most taxpayers could lose would be €65 million is utterly spurious. There would be VAT revenue and no risk if the houses were sold at whatever the market would bear, however low that might be.
My second concern is the market manipulation of house prices, which is precisely what caused our current economic woes and is totally contrary to current Government policy. It artificially inflates the notional value of a house. This is a complete distortion of the housing market and prevents, or at least postpones, the return to any kind of a real market for houses, whatever that level may be.
My third concern is related. It is the damaging impact on other house sales and on the hapless owners, many of whom are in negative equity, who wish to sell their houses. These houses are, in many cases, similar to the NAMA properties and sometimes even next door to them. These vendors now find their homes unsaleable at the market price because the house next door is being sold 20% cheaper. Similar houses, which are privately owned and being privately sold are devalued by 20%. In fact, the entire housing market will now be benchmarked by this extraordinary device. It is totally artificial and is not what the housing market needs at present.
NAMA believes it does not need Government approval for this scheme and I know its powers are considerable. However, it does have a responsibility, as we do, to protect the interests of taxpayers. I do not believe this scheme does that. In fact, it is against the interests of taxpayers and I ask the Minister to consider the implications of this further exposure of taxpayers.
I thank the Deputy for raising this important issue and for her reflective remarks concerning the proposal the chief executive officer of NAMA has made to the Minister for Finance. My understanding from the Minister is that the chief executive of NAMA has sought his agreement to the introduction of a deferred consideration mortgage initiative by the agency in respect of its domestic residential property portfolio.
The proposal is one of a range of initiatives that NAMA is examining with a view to maximizing the return on its asset portfolio. Prior to its submission to the Minister, I am informed that the initiative had been approved by the NAMA board. The details of the initiative are currently being reviewed within the Department and the Minister will respond to NAMA when that review has been completed.
The broad concept is that NAMA will offer a limited price protection - 20% of the purchase price for five years - to buyers of its housing stock. The limited protection will be 20% of the purchase price for five years. It proposes that it will be apply to 750 units with an estimated value of about €150 million. This means that a buyer would pay 80% of the purchase price up-front, funded by a 10% deposit and a first mortgage tranche of 70%. A second tranche of 20% would be payable in five years to the extent that the property value had not fallen at that stage.
NAMA will not be providing the finance directly. Rather it will work with existing mortgage providers. In this context the CEO of NAMA recently said the agency has had detailed discussions with AIB, Bank of Ireland and Permanent TSB. He also stated the agency had asked the other banks, through the Irish Banking Federation, if they wished to participate. Any mortgage provider participating in the initiative would issue the mortgage with its own underwriting criteria. The mortgage provider must commit to the second tranche at the outset, subject only to the final property value.
While some commentators and analysts have suggested that the initiative could artificially support house prices, NAMA has engaged consultants to complete an economic study of the potential impact of the initiative. It concludes that the most probable impact will be to accelerate movement towards a natural price floor. The agency also suggests that an alternative strategy of non-intervention could lead to a prolonged period of stagnation, with potential buyers continuing to defer purchases. In support of this, the NAMA CEO recently pointed out that in the first half of 2011, only €1.2 billion in mortgages were drawn down, which suggests that draw-downs for the year as a whole could be around half of the €4.5 billion figure which was Goodbody Stockbrokers' prediction at the start of the year.
It is in all our interests that every effort be made to get the market moving again, with prices set at realistic levels. For example, NAMA's experience with one developer whom it instructed, on foot of an agreement reached with him, to reduce the price of houses in a development built three years ago, was that over the course of two weekends some 20 of the houses in question were sold. This confirms that the market is quite price sensitive.
Overall, NAMA is focused on managing its assets to achieve the best possible return for taxpayers without engaging in the dumping or speculative hoarding of property assets. In this regard, NAMA believes the deferred consideration initiative will protect portfolio value and optimise taxpayer benefit better than a non-intervention strategy.
There are risks associated with the initiative, as the Deputy rightly pointed out in her contribution. In discussions with the Department of Finance, NAMA has sought to address these risks. NAMA also has assured the Minister that it will limit the initiative so that its scale will not create significant market distortion or artificial price support. However, the initiative is still being considered and the Minister will reply to NAMA when those considerations are complete.
I accept that the motivation behind this proposal is to find an ingenious way of getting the market going again, disposing of properties and recouping the taxpayers' outlay. I remind the Minister of State and the House that NAMA is the largest property owner in the world. While the initial sale is of a mere 750 houses it is to be extended to 5,000, and the potential damage of that number of sales is enormous and will be enduring. Apart from the impact of the subsidy on price, there will be a huge impact on the volume of other sales. Incredibly, it seems that NAMA is now going to facilitate the provision of finance, as the Minister of State has said, through the three named banks. At best, this will absorb almost all the available bank mortgages, leaving no finance for private sellers and buyers. At worst, I suspect that NAMA will, effectively, provide some kind of mortgage insurance for the banks, which disadvantages other sellers and buyers and distorts the market.
This is another unquantifiable risk being piled on the backs of taxpayers and is not in accordance with the mandate of NAMA, which is to protect taxpayers. The scheme should not be allowed to proceed, at least without pause for thought about its implications.
I thank the Deputy for the points she has made in this short debate. She has done a great service to the House in raising these issues.
On behalf of the Minister for Finance, I remind the House that the matter is under consideration. When NAMA wrote to the Minister it sought his agreement and that of the Government to the proposed initiative. In all of these matters, a balance must be struck between trying to maximise the potential return for taxpayers, through NAMA, on the sale of these assets and trying to get the property market going again. As I am sure the Deputy is aware, there is no market currently. We all have a vested interest, in terms of our pensions, the future of the country and the construction industry, in making sure we get to the bottom of the bottom of the housing market. Whether that can be done through this scheme is a matter on which the Minister has yet to come to a final view.
It is my understanding from NAMA that a total of 10,000 properties currently exist on its portfolio. Of these, 8,000 are apartments and 2,000 are more traditional semi-detached and detached houses. I do not think the 8,000 apartment units would be part of this tranche, because the current demand is for more conventional houses.
We will work with NAMA to see the best option. The Deputy has, rightly, stated the concerns attached to this proposal and these are matters on which the Minister will reflect before coming to a final decision. I appreciate the Deputy's remarks.