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Aaron McKenna: Massive state intervention in house building? Welcome back to 2007

In the normal course of things, Nama would be wound down and consigned to the history books…

Aaron McKenna

WHEN NAMA WAS set up to be a ‘bad bank’, taking on the impaired loans of our banks and becoming the largest state-owned property owner in the world, it was a Hail Mary pass that government prayed would at least break even after ten years or so.

Mission Accomplished: Nama will now sell off the majority of its assets by 2018, with break-even achieved by the time 80 per cent of the portfolio is sold. Michael Noonan had the option to sell off the entirety of Nama this year to one of a number of super-sized private equity firms, and interest remains strong.

After several years of strong and effective management of the agency, the vision (or, perhaps simply, hopes) of the late Brian Lenihan has come to fruition. In the normal course of things, Nama would be wound down and consigned to the history books as an example of a fire fighting mechanism that countries can turn to in a financial jam.

Government bureaucracies are durable things, however. With the end in sight and the prospect of profit in the back pocket, civil servants, politicians and apparatchiks at the predestined agency have been looking at ways to leverage its significant clout against the new troubles that confront the country today.

Housing and office shortage

Though the legacy of our bust is far from gone away, the most immediate troubles we face seem to have come full circle. We have a chronic housing shortage and massive demand for office space that doesn’t exist in the formats needed to sustain our foreign direct investment.

House prices are rising at 0.1 per cent per day in Dublin, nearly €6,700 per month. The Taoiseach has insisted that he does not accept there is a bubble forming. Close your eyes and imagine not a Mayo lilt when hearing that in your head, but the Drumcondra warble. Welcome back to 2007. Do you know what a tracker mortgage is yet?

In the midst of this, Nama is a powerful force. It has billions in cash it can put to work on construction projects and some of the tastiest development land in the country on its books. The agency has clout with government, banks, international financiers and local developers.

At the very top level, Nama is a great base for property development. OK, so the agency hasn’t had much actual real experience at building things; more offloading stuff. But assume it can overcome that challenge as adroitly as it did the much more exotic one it faced when it was born.

On the face of it, of course, state agencies are the best at running almost anything. Airlines, telecom companies, power companies, the list goes on. Sure, government has such scale in its operations and carries such clout, can borrow so much money to finance things, it’s the perfect vehicle for running any state.

Except, of course, it isn’t. State-run entities inevitably try to be monopolistic, they do everything at a premium in cost to everyone else, tend to be slower, and get caught up in political manoeuvring and favouritism. Aer Lingus used to charge you an arm and half a leg to fly anywhere when it had a monopoly on that market. Telecom Eireann would put you on a waiting list to have a telephone installed, with about the same delay as experienced by citizens of East Germany. We pay some of the highest electricity and gas prices in Europe, and coincidentally have some of the best paid electricity and gas workers in Europe.

Who pays? 

When state-run entities run into trouble, it is the taxpayer who is on the hook for their mistakes. Every dodgy pension fund and glass bottle site in the land has had to be paid for by taxpayers, not to mention all the things we decided to take into state ownership. Like the banks in the first place.

The change in mission for Nama reeks of political expediency meeting bureaucratic survivalist instincts. NAMA is facing increased competition for its staff because we are seeing the returns to what could be a normal functioning property and banking sector. One of the reasons for its change in focus is to retain these staff. Another reason is to help politicians get their way.

Politicians like to point and shoot at policy issues. Normally they have to try and influence. During the boom they helpfully provided as many tax incentives and programs that you could shake an accountant at to fuel the fire. Now, they have a whole government run agency full of money and land! After all, state intervention worked so well the last time.

Too few houses? Get Nama to intervene and sort it out. Only, it probably won’t be that simple. Nama has to try and compete with its own developers and partners now, and will inevitably face conflicts of interest all over the place when deciding where to shovel resources and attention. Whatever the talk of good intentions, it has been the observed trends of State Goliaths like Nama to stifle competition for its own ends, just naturally and without malice.

Politicians will try and influence Nama to sort specific problems, and may well find themselves developing too much of the wrong thing in the wrong places. They will be gambling on the property market now as owners or major stakeholders in the majority of the development, the lending at all stages, the sale of new assets and the tax collectors on transactions at all stages.

The risk will sit with taxpayers, and the higher prices that will inevitably come if there is a monopolistic player in the market will also hit taxpayers.

A normal market

We should be trying desperately to return to a normally functioning market. Nama should at best be kept around to help finance developments where credit is tight, on assets they’ve sold into the private sector. Let private enterprise pick the winners and losers and take the hit when things go sour.

Let multiple companies fight amongst themselves for the best deals, providing the best value. And let the state sit back and try to moderate the incentives and disincentives it levies through taxation and policy measures.

We did a lot of things wrong during the boom. Trying to re-invent property development as a state run enterprise is not the solution, however. Most experience of state meddling in things of this nature in such an intimate fashion is bad.

Nama had a mission. It has completed that mission, or is on track to do so. It should slip away quietly into the night, and we should remember it as a warning from history on what happens when we let a property market run the country. We should not allow it to become a future case study in what happens when we try to run the property market. There’s every chance it’ll be a bad story.

Aaron McKenna is a businessman and a columnist for TheJournal.ie. He is also involved in activism in his local area. You can find out more about him at aaronmckenna.com or follow him on Twitter @aaronmckenna. To read more columns by Aaron click here.

Read: “It’s tough against faceless power on that level” – cultural groups fight losing battle with Nama

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