Economics 29/07/2009: NAMA time horizon

Peter Bacon on today’s Morning Ireland has stated that the time horizon for the real estate cycle built into NAMA assumptions is between 5 and 10 years. I have written about this assumption in the previous post (here). Assuming that what is meant by the ‘cycle’ here is peak-to-peak U-cycle, the most conservative Government estimate, then, is for the growth of 14.86% annually in house prices, if we are now at the bottom of the cycle. Oh, that is realistic, of course, but only if the Government spends the next few months blowing up – physically – so much housing stock in this country that it will create a massive overhang in demand over supply. Good luck!

But there is an added complication that was revealed by Liam Carroll’s examinership case. As we all knew, loans to developers, by and large – all developers – to date have not been serviced with interest roll overs becoming a routine at the very latest mid 2008. This means that by the time NAMA purchases a given loan with face value €X, given the reasonably expected average rate of interest on refinanced loans of 8-11%, this loan will be refelective of:

  • 12.24-16.95% cumulative rate of rolled interest, plus
  • the orignal principal of €0.8305-0.8776 to the Euro of the face value of the loan

Now, suppose NAMA applies a haircut of 25% on the loan, so we buy €1 of the loan at a price of €0.75. What do we get for that €0.75? A loan that had at the time of its origination an underlying asset value of €0.83-0.88. So the real face value discount we are getting is 0.75/0.83 – 0.75/0.88 or 9.64% to 14.77%.

But wait, the actual principal (face value) amount has depreciated by, say, roughly 50% since the time the loan was written, so in reality, the discount NAMA will take will be negative 70-78%! What does it mean? Take a simple analogy. You walk into a shop and see a TV advertised ‘For Sale’. The signs reads:
Original Price €100.00
Sale Price €178.00
How fast will you walk away from this ‘deal’?

NAMA will overpay for the assets it buys on a vast scale!