Government actions ‘led to increase in property prices’

Economist Dr Peter Bacon has told the banking inquiry that recommendations he made on the housing market were reversed too early by the government, which ultimately led to increases in property prices.

Dr Bacon authored the “Bacon reports” on the housing market in Ireland, which were published in 1998, 1999 and 2000. He is also credited with designing the National Asset Management Agency (Nama).

He said all the recommendations in his reports were implemented by government, which stabilised the situation.

Inquiry chairman Ciarán Lynch asked Dr Bacon for his views on the government’s decision to reverse some of his recommendations in 2001, such as the cutting of stamp duty to investors. “I think they were too early,” he replied.

Mr Lynch also asked Dr Bacon whether he was consulted on the reversal of the proposals, to which Dr Bacon said “no”.

“My job – let’s be clear about it – I’m the paid economic consultant,” he said.

He added that the reversal of the proposals had led to an increase in prices.

In relation to the National Asset Management Agency, Dr Bacon was asked to give a brief outline to the committee about the events that preceded his report on the agency.

He said it was approached by then minister for finance Brian Lenihan on two occasions.

“Through a mutual acquaintance he asked if I would meet him for a chat about the situation,” said Dr Bacon. “I think that was in November/December 2008. I met him in Government buildings with the second secretary present at the time.

“The meeting happened. The meeting ended. I walked away scratching my head.”

Dr Bacon said he then received a phone call in late January 2009 during which he was asked to meet with Mr Lenihan a second time.

“It was a chat about ‘look, the situation is deteriorating. I’m canvassing views on ought to be done, what needs to be done, what the options are’, and I met him again,” said Dr Bacon.

“I felt myself that it was a similar discussion to the previous one but he did at the end of it say to me ‘you seem to have developed your thoughts significantly more than the last time we spoke. Would you do some work? Would you commit these thoughts to paper and carry out some work?’ And that’s what happened.”

In terms of the setting up of Nama, Dr Bacon said it was considered “imperative” that initiatives be undertaken to stabilise the banks in order to eliminate the need for a renewal of the bank guarantee.

“It was considered imperative that initiatives should be undertaken that would lead to stability in banks deposit and term debt liabilities and eliminate the need for a renewal of the guarantee,” he said.

“To achieve this required removing all doubts about capital adequacy of the credit institutions and their capacity to deal with prospective loan impairments.”

Dr Bacon said that “at the heart of the banking crisis was a concern of capital markets with the adequacy of banks capital to meet future loan impairments and institutions’ capacity to obtain additional capital externally”.

“Future impairments were of concern because, for the previous decade Ireland had experienced rapid inflation in property values and lending to the property sector had become an increasingly important component in credit institutions’ lending,” he said.

“In addition, there was heightened international concern about the health of the financial sector.”

Addressing developments in Ireland’s housing market and in the Dublin region in particular, Dr Bacon said they were “symptomatic of fundamental change in housing patterns”.

“House price inflation especially in Dublin began accelerating from 1993, reaching 14 per cent per annum in the four years to 1997 and 25 per cent in 1997,” he said.

In terms of an “effective” recommended policy response, he said it was considered necessary to achieve better balance between demand and supply in the short term; to improve the potential supply of housing; to engage in infrastructure developments; and to improve medium and long term planning of development of the east region.

He said specific recommendations were made with regard to achieving a number of goals including higher residential densities, and the acceleration of the process of securing required planning consents on significant sites in Dublin City and County through the use of Strategic Development Zones.

In terms of the outcome and an assessment of the response, he said the rates of increase in prices of new and existing houses in Dublin and nationally slowed sharply from the middle of 1998. The peak rate of inflation in the new house market was 24.6 per cent (1998 Q1) countrywide and 33.8 per cent (1998 Q1) in Dublin.

By the first quarter of 2000 these rates had halved to 12.9 and 16.2 respectively. In the existing house market the peak rate was 36.9 per cent (1998 Q3) countrywide and 41.7 per cent (1998 Q3) in Dublin.

He said these rates more than halved to 17.4 per cent and 20 per cent respectively in the first quarter of 2000.

At the same time the annual rate of new house completions increased about 10 per cent to

46,512 units, which equated to “the highest annual rate of completions ever recorded to that time”.

“However, in 2001 the measure to exclude interest deductibility was reversed,” he said. “Thereafter prices re-accelerated, despite a supply response rising to 90,000 units annually, as speculative forces gathered increasing momentum.”