Negative equity protection may simply distort house market - The Irish Times >>>This will lead to a further drop in prices as private vendors drop prices NOW to compete!

SHOULD THEY or shouldn’t they? The National Asset Management Agency seems determined to press ahead with its scheme to start selling residential properties with negative equity protection. The first 750 are due to go on sale in the new year and, if things go well, then up to 5,000 properties could be put on the market.

Under the proposal, the agency will absorb any fall in value of the property for five years after the sale up to a maximum of 20 per cent of the sale value. A mortgage based on the full sale price will be arranged through a bank, but will be adjusted after five years based on the market price of the property.

It’s a simple scheme and would seem to be a creative response to the fear holding back a normalisation of the market. It also chimes well with the notion of Nama trying to marry its commercial mandate with some sort of wider social brief.

The Government, however, or parts of it at least, is not convinced of its merits. In particular, the Department of the Environment and former minister of State with responsibility for housing Willie Penrose. They are reported to oppose the scheme on the basis that it represents an intervention in the market and may put a false floor on prices.

This new-found respect for the omnipotence of market forces is understandable given the events of the last decade, but arguably a bit simplistic. The property market at the moment is probably every bit as dysfunctional as it was in 2007, but this time fear has displaced greed.

The case for intervention at this stage on the way down – with prices off by 50 per cent –can be made in much the same way as the case for intervention on the way up long before 2007.

The other point to bear in mind based on recent experience is that if prices really have much further to fall, then the release of 750 properties backed by some sort of negative equity protection scheme will not make much difference.

This, however, leads on to what is the more interesting point: what happens to the market and prices if every seller is forced to offer negative equity protection.

It is not really clear if this point has been thought through, but it seems pretty obvious that if you are trying to sell a property on the same street as Nama and they are offering negative equity protection then you have not really got a hope.

If you want to sell your house you will have to offer something similar and there is at least one similar negative equity product on the market through a specialist financial services company – but to date take-up has been low.

What would be a game changer would be if the three banks that are earmarked to operate the negative equity protection scheme for Nama – Bank of Ireland, AIB and Permanent TSB – were to voluntarily offer the same product or a variant of it to private sellers at reasonable cost. This assumes they are interested in lending in the residential market in the first place. Which is another issue.

It would be even more interesting if the Competition Authority decided to get involved and force them to do so. Which it should do because, viewed from the narrow competition policy perspective, Nama is – with their assistance – abusing both its massive financial fire-power and its market dominance.

The normal competitive oversight of the banking sector has, of course, been set aside under the extraordinary powers the Minister for Finance has taken on to sort out the mess that is the banks. And presumably the authority can be told to back off, should it have the temerity to enter the debate. But as the Government discovered in the recent stand-off with the banks over passing on European Central Bank interest rate cuts, lack of competition can compound problems even in a banking industry as badly broken as the Irish one.

It is an interesting paradox. If you introduce a level playing field in which every vendor must be able to offer negative equity protection – at a reasonable cost to themselves – in order to be able to compete with Nama, then such deals will quickly become the norm.

What have you done then? Have you orchestrated massive – and in theory pointless – intervention in the property market or come up with a radical solution to a market paralysed by fear?

via irishtimes.com

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