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Posts tagged ‘Committee of European Banking Supervisors’

House prices to drop another 30% in the next two years !

Has the Governor of the Central Bank given home buyers the green light to demand a 30% discount?
namawinelake | March 18, 2011 at 7:12 am | Categories: Irish economy, Irish Property | URL: http://wp.me/pNlCf-1b4

Warden Barrowclough: I’m here at the request of one of my senior colleagues. Well, I think you know that I know that you know what I know
Norman Stanley Fletcher: Oh do I?
Barrowclough: The word on the grapevine is that you can put your hand on what he hasn’t got.
Fletcher: Well if he hasn’t got it, I don’t see how I can put my hand on it, sir. And if he has, I’m not sure that I want to, you know what I mean?
Barrowclough: Don’t be obtuse Fletcher. We both know what I am on about. And I want you to know that I heartily disapprove of this.
Fletcher: Oh so do I sir, so do I, but we are just the go-betweens, ain’t we eh? We are merely here to maintain the status quo. And if we don’t come to some little arrangement they go in the auction Sunday.
Barrowclough: Ah, arrangement yes. My function is to ensure that the item in question is restored to its rightful place
Fletcher: To wit, his mouth.
Barrowclough: I think we see eye to eye
Fletcher: Oh yes, well you know what they say sir, an eye for an eye and a tooth for a mouth.
Barrowclough: I’ve been authorised to go up to a fiver
Fletcher: Then the quicker you go up to it the better, sir.
Barrowclough: Well hang it all Fletcher! I would like to make some token gesture towards bargaining.
Fletcher: Oh I’m sorry sir, sorry you go ahead, bargain away sir
Barrowclough: £3.50?
Fletcher: A fiver
Barrowclough: Done
Fletcher: You certainly have been
Scene from Porridge (the movie, 1979) where the warden Mr Barrowclough is trying to retrieve his colleague’s dentures stolen by prisoner Fletcher
The information released by the Central Bank of Ireland on Wednesday which set out the macroeconomic parameters for the ongoing bank stress tests, was truly shocking for a number of reasons. The information was released a few hours after the Central Statistics Office made a major revision to the unemployment rate and lifted the February 2011 unemployment rate from 13.5% to 14.6%. And the CBI parameters didn’t even take account of this major revision which might make some of the other parameters look even worse. Of particular interest on here were the parameters in respect of Irish commercial and residential property, and this entry looks at what the parameters mean for residential property.
But before examining the parameters, it is worth looking at what these parameters represent. The CBI has produced what it calls “baseline” and “adverse” parameters and its press release says (my emphasis) “stress testing is used by banking supervisors to determine whether a bank is adequately capitalised to withstand adverse macro-economic events or unanticipated ‘shocks’. It is not an economic forecast: it employs hypothetical scenarios.” Whilst it is understandable that the adverse scenario is not a forecast, I would have expected the baseline scenario to indeed be a forecast. The press release from the CBI is woefully brief but if we go back to the now-discredited Committee of European Banking Supervisors (CEBS) stress tests last summer, we see that what they referred to as the benchmark scenario was indeed a forecast lifted from the “EU Commission Autumn 2009 forecast and the European Commission Interim Forecast in February 2010, with several adaptations to reflect recent macro-economic developments in a number of countries.” The adverse scenario was internally generated by the CEBS. So contrary to what the CBI says, it does indeed appear that the baseline scenario in the present tests is a forecast. I stand to be corrected on this and have asked the CBI for clarification.
And that being the case, what should a “baseline” forecast decline in residential property prices of 13.4% in 2011 and 14.4% in 2012 mean for buyer behaviour in today’s market? Firstly it depends on how credible you think the CBI is. Certainly its governor, Patrick Honohan enjoys above-average trust and a reputation for plain-speaking – he was after all, the man who revealed that we were seeking a bailout last November 2010 when the national mood was that politicians were taking us for idiots. He is the first governor of the CBI not to be an appointee from the Department of Finance and was chosen from a wide field on merit. Research for a previous entry on Governor Honohan revealed him to enjoy the trust of wide-ranging interests and the reputation of being capable. Of course he hasn’t looked too bright with his constantly-increasing estimates of the bailout costs of the banks – for example, INBS’s estimated bailout went from €2.7bn in March 2010 to €3.2bn in August 2010 to €5.4bn at the end of September 2010 but the Governor might say that was because of new information uncovered by NAMA. So how good will the forecast of residential property prices now be? Difficult to say, but in terms of the source, it must be one of the most credible forecasts we are likely to get.
What does a decline in prices of 13.4% in residential property prices in 2011 and 14.4% in 2012 actually mean? It means that a property “worth” €200,000 at the end of December 2010 will be worth €173,000 at the end of this year and €148,000 at the end of 2012. The average price nationally at the end of December, 2010 was €191,776 according to the Permanent TSB house price series. So with the purchase of an average-priced house you will lose close to €50,000 net in the next two years. You could rent an average house nationally here for about €1,000 per month. A typical interest rate on mortgages is 4%. So if you buy today with a 100% mortgage, over the next two years you will spend some €8,000 on interest and lose €50,000. Compare that with paying just €24,000 in rent. And given the anemic economic outlook (GDP increasing 0.9% this year and 1.9% next year) with relatively high unemployment (13.4% this year and 12.7% next year and remember this was before the CSO dropped their bombshell on Wednesday), there will be worry that you might not be able to meet your mortgage commitments. Oh, and of course there is a property tax and a proposal for water charges in the pipeline. Wouldn’t you need to be a complete idiot or be able to find a property significantly below its “worth” to actually buy today?
So coming back to our opening scene above from Porridge – if you are a buyer and you believe that prices will drop by 13.4% in 2011 and 14.4% in 2012 and your seller also believes that to be the case, then like Norman Stanley Fletcher you might go through the motions of having a negotiation but the terminal price is going to be a price which reflects the drop in prices over the next two years. And if there is no such bargain, the market will freeze and there will be practically no transactions whilst we all wait for the bottom, and if we do have that type of distorting behaviour – waiting for two years for prices to hit the bottom –  there is the risk that prices might drop even further if there is a supply glut during a short period. So it probably is the case that Governor Honohan has given buyers a green light to demand a 30% discount on current values and if you’re not getting a 30% discount, then as a buyer you are being done. It’s worth remembering that there is an adverse scenario which projects a 32% decline in the next two years.

source: http://namawinelake.wordpress.com/2011/03/18/has-the-governor-of-the-central-bank-given-home-buyers-the-green-light-to-demand-a-30-discount/

Comment:

An excellent article from  Namawinelake :

Two years ago I first published a formula I personally use when I am considering the purchasing of property.

I recently viewed an apartment in Wicklow Town and the asking price was 280K this was down from 530k only two years ago .so if I were to use my formula here it would be as follows

The Apartment was a three bed in need of some restoration work but mostly cosmetic!

The rent was 900euro per month and I do know that rents are set to fall; with the rise of unemployment and the new austerity measures on the way the new water charges and property taxes not to mention the registration fees for letting properties and the new tenant rights I’m not sure it is a good time to be a landlord now.

So 900 euro at 12 months = 10.800 Euros per year X ten times that is 108,000:00 Euros Max should be paid for this property but as you see the owner is still quoting unrealistic prices for the property.

But this would be expecting a return of 10% per year .The current rent would not even pay the interest of 5% on a lone of say 250.000:00.The return on your investment would be less than 1.5%. On the other hand In Germany in the town of Lubeck I can get a great apartment with a  8% return for Euro 65,000:00

So we have a long way to go yet until we get to the bottom!

Bankers have learned nothing!

 

In the UK

Bankers have learned nothing!

So what about the Irish Bankers?

The Irish people are been fleeced in order to prop up crafty corrupt top bankers, their pals in politics and their cronies  

Sorry the same story nothing has changed!

European bank stress test scam!

European bank stress test – official estimates signify NAMA is unintentionally overpaying for loans and undermine DoF’s claims about the Bottom

namawinelake | July 24, 2010 at 6:28 am

The Committee of European Banking Supervisors (CEBS) together with the EC and ECB has published its eagerly awaited results of stress-testing 91 European banks. The two Irish banks included in the exercise, Bank of Ireland and Allied Irish Banks passed the stress-test which set out to examine the capital base of banks in two scenarios – a benchmark scenario and an adverse scenario. Good news for BoI and AIB – seven other European banks didn’t pass the test.

As stated in the report “the benchmark scenario was based on the EU Commission Autumn 2009 forecast and the European Commission Interim Forecast in February 2010, with several adaptations to reflect recent macro-economic developments in a number of countries. The adverse macro-economic scenario was based on ECB estimates”. The assumptions for Ireland are summarized below together with the calculation by the CEBS of the effect on commercial and residential property prices

For information, here is a round up of recent predictions/projections for the Irish residential market:

For information, the ESRI published this week recovery scenarios for the State  – the high growth scenario and the low growth scenario. Both scenarios forecast 2010 GDP to contract by 0.4% and unemployment in 2010 to reach 14%.

What makes the stress test fascinating from the point of view of NAMA is its forecasts for commercial and residential property prices. It’s benchmark scenario is for a 15% compound decline in residential in 2010 and 2011 with drops in both years, a 19% compound decline in commercial in 2010 and 2011 with drops in both years. There is no projection beyond 2011. NAMA has chosen a Valuation Date of 30th November, 2009 pursuant to section 73 of the NAMA Act by reference to which NAMA is valuing the loans being transferred from the financial institutions.

How much does property need recover by 2020 assuming

1. Prices stop falling at the end of 2011

2. All property is sold in December 2020

3. 67% of property is located in Ireland

4. 33% of property is located in the UK

5. Property in the Ireland and the UK is split 50:50 between commercial and residential

The table below what recovery needs happen if NAMA is forced to rely on the recovery of the property market to break even – remember in the draft Business Plan is that the recovery was a flat 10% over 10 years. With the CEBS benchmark scenario, the recovery would be 24.7% and in the adverse scenario 41%. Both of these represent significant changes to NAMA’s draft Business Plan. To emphasise, assuming prices stop falling after 2011, the compound rate of growth needed would be 2.5% per annum for each of the nine years in the benchmark scenario and 4% in the adverse scenario.  These compound percentages might be rendered meaningless if there is significant default and NAMA’s interest receivable falls below its interest payable.

Perhaps a more interesting implication from the benchmark scenario is related to the question of whether NAMA is overpaying for loans now by paying for loans according to the 30th November, 2009. The answer is a resounding yes and if you compare forecast prices at the end of 2010 with the 30th November, 2010, there is an implication that NAMA is overpaying by something in the order of €3-6bn again based on the following assumptions:

1. NAMA acquires the loans by reference to a valuation date of 31st December 2010

2. Price changes in the month of December 2009 have been ignored

3. The LEV remains at a constant 11% above CMV

4. 67% of assets are in Ireland

5. 33% of assets are in the UK

6. The split of assets between commercial and residential is 50:50

Now of course the above is very much a simplification. NAMA’s assets may not correspond to general commercial and residential forecasts – where is development land for example? NAMA will have 7% or so of assets in the Rest of World. NAMA’s LEV as a percentage of CMV may change. So far this year in Ireland residential is off 5% (to the end of Q1) and commercial 8% (to the end of Q2) and the UK is broadly positive, so we have some way to drop before we get to the EU benchmark scenario. There are other assumptions but it is a fair representation, I believe, to say that we are overpaying by billions for NAMA loans by reference to current values – some overpayment was planned via the Long Term Economic Value device but the overpayment being referred to here is on top of that.

Lastly this stress test report comes on the heels of the publication of the EU’s Decision in respect of the first Anglo restructuring plan which was submitted with the DoF’s imprimatur, to the EC in November 2009. The Decision (paragraph 41) revealed that Anglo was planning for property prices were seen to drop in 2009 by 15-19% [actual according to Permanent TSB/ESRI was 18.5%] and continue falling in 2010 and 2011 before starting to rise in 2012. The average decline in property prices in the plan is estimated at 47% peak to trough but in the worst case is 62%. And now with this stress test we have the official EC/ECB estimates that property will continue to drop this year and next. Of course a finance minister has a responsibility to instil confidence but Brian Lenihan’s Bottom statements in September 2009 and April 2010 are now looking distinctly disingenuous and more importantly damaging because the Bottom will come at some point but may overshoot because of a lack of confidence in advice from the government.

source http://namawinelake.wordpress.com/2010/07/24/european-bank-stress-test-%e2%80%93-official-estimates-signify-nama-is-unintentionally-overpaying-for-loans-and-undermine-dof%e2%80%99s-claims-about-the-bottom/

comment

Needless to say this whole stress test episode is just a political stage show for the benefit of Joe public  in Euro land .The sad fact is that this test has absolutely no value whatsoever as it does not take into consideration the real dodgy bonds and loans that are the cause of the banking crises in Europe 

The various European politicians have jumped on this and are telling us and the markets that there is no financial crises with our banks and the  European Banks and it’s all a bad dream  that we are all collectively having!.

Cowen and Lenihans assurances that we have turned the corner in 2009 and again in April of this year were lies and dam lies!

How anybody will ever believe a word out of their lying mouths again I will never know!

We now need to wake up and start spending again and where are we going to get the money to spend when we are out of work, when the gangsters in the same “sound banks” are hiking interest rates and pushing people out of their homes as a result of their gambling

The government having poured billions into these same Toxic Banks, are desperately trying to get those of us that still have a little money to invest in these bankrupt banks so they can again start the whole rotten pyramid cycle all over again.Now that the country  is practically bankrupt, they are now about to sell off the last vestiges’ of silver ware the country has left, along with proposed new toll, s on the National roads network, along with home rates and water charges where can we go from here?

500,000 people are out of work and for the last two years none of the politicians in power or the crony independent TD, s that are propping them have done anything for the unemployed

The current government’s unemployment policy is to” let them eat cake “and waffle on about the smart economy

That’s smart all right 60,000 young people left the country last year and the ESRI believes at least 200,000 more will have left by 2014

Clearly the unemployed are only receiving lip service and are way down in the pecking order!

We need a complete change of the political system

Help get rid of the gombeen, s running this country,

Get active on the ground in your own neighbourhoods and do not vote the same leaches back into office

it’s time to change  the system!

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