McWilliams - latest solution to banking/property crisis

[mollox]

David McWilliams (SBP 4/1/09) has come up with another solution to the banking/property crisis.

Sunday Business Post | Irish Business News

He proposes that collateral be valued on a 20-year moving average basis, rather than a current market value basis.

McWilliams doesn’t provide any worked examples to illustrate the impact of what he proposes, and I haven’t been able to work out what my home would be worth on this basis, but I suspect it would put a hell of a lot more people into notional negative equity on both residential and commercial property.

By applying such a formula, it would seem inevitable that notional property valuations, as a prerequisite for raising finance, would fall even more dramatically than has been the case to date in the real market.

This, in turn, would presumably translate into further real falls in property value as potential buyers would be unable to raise finance at levels higher than those approved under the notional valuation model.

[gaffer falls]

Am I the only one thinking this guy is way overated.Has he been advising the government?Hearing him speak he sounds very lightweight, like a modern obsevational comedian or Gerry Ryan solving the nations woe. He seems to go for the clever oneliner.Is he a journalist or an acedemic?

[seabhcan]

Sounds unworkable to me. It would mean, at times, that the ´collateral´ value was greater than the market value.

A better solution would be to task the government with keeping down house price inflation. The price of housing and rent should be included in the Consumer Price Index.

Housing is a commodity. It is foolish to build our society around the need for price inflation in one particular commodity.

[Oppenheimer]

The general point about placing realistic values on property is well taken - considering that it is the largest asset many people will buy and we have indeed seen that it has the potential to bring banks to their knees when they get it wrong. I think however, much of the banks' real problems are with the tens of millions they are exposed to with the developers.
Sure there is a real problem of too many people having lent too high a multiple of their earnings and this has driven the notional balance sheet collateral that determined future lending rules for banks, but I think making the case that assuming long run average valuations for residential property alone will solve the problem is probably not enough. If there is anything to be learned from this it is that we need more transparency of house pricing - would anyone think of going to a car showroom and put up with being asked what they think the car they want is worth - but it can't be below a certain amount!?

[goosebump]

Is he a journalist or an acedemic?

He was an economist and worked in the Central Bank for a while.

Now he's a celebrity, so you are required by law to agree with him.

[SPN]

Sounds unworkable to me. It would mean, at times, that the ´collateral´ value was greater than the market value.

That is the point!

We need to get some smoothing into the system and to remove sudden shocks. It is the sudden shocks which throw the system into disarray.

I believe we were discussing this on another thread in which I suggested that the collateral should be quarantined somewhere in a way that would remove the need to revalue it until such time as the system was able to cope with the revaluation.

McWilliams obviously sees the same problem, and over the long term his suggestion has merit.

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[seabhcan]

That is the point!

We need to get some smoothing into the system and to remove sudden shocks. It is the sudden shocks which throw the system into disarray.

I believe we were discussing this on another thread in which I suggested that the collateral should be quarantined somewhere in a way that would remove the need to revalue it until such time as the system was able to cope with the revaluation.

McWilliams obviously sees the same problem, and over the long term his suggestion has merit.

..
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With this system, I could walk into a bank and get a 400k mortgage for a 200k house on the basis that the house has a 20year average value of 400k. I then take my 400k and buy two houses for 200k each. I default on the mortgage, but the bank can only reposses one house - worth 200k. I keep my other house and the bank gets screwed.

Why would the banks agree to such a system?

[The Earl of Desmond]

So what if you have negative equity? As long as you keep a job and pay your bills then it's just a paper 'loss' and means nothing. Just like all these people moaning abou the fall in prices seem to forget that if their house value has fallen so has everyone elses so it balances out - the only people affected are first time buyers who now need huge deposits.

The whole system needs to change - hous prices need to fall, a secure proper pension system needs to be put in palce, the obsession iwth share price needs to end, as does the obsession with profit plus business people need to relearn the lesson that profit is meant to be anything left AFTER all bills - bill include rent and rates and tax and salaries and money for new products and expansion or redoing a shop etc etc. So if a firm makes less profit one year than the last big deal. It still covered it's costs.

There's no end of the world recession in Belgium or Holland or Denmark or Austria or Israel or Norway or other countries like that which are comparable to Ireland instead of deluding ourselves that we shoudl be comparing ourselves to the US or UK or France or Germany - Ireland is a small economy so compare like with like.

[seabhcan]

So what if you have negative equity? As long as you keep a job and pay your bills then it's just a paper 'loss' and means nothing.

Indeed. Nobody worries about negative equity when they buy a car of holiday on credit.

The problem is when people buy things they can't afford in the hope of the commodity increasing in value, and selling it to pay back the loan. This is why the builders are in such difficulties.

[The Earl of Desmond]

Well a good recession is just what we need - managed well everyone should come out of it better - like when you cut back a tree whose roots are cracking the pavement or pipes and for a while it looks horrible and about to die but then it starts to grow at a much more manageable and realistic rate and looks far better.

The problem is Ireland doesn't have anyone to manage this recession properly.

I mean Cowen can't even provide a list of what the government spends money and then to be able to go through each item and cut it completely or reduce it by a certain %. So the longer he puts off taking any decisions by asking for reports and setting up committees the less likely Ireland will come out theo ther side witohut major problems that need to be corrected and take 20 years.

This has been going on for - let's be chartiable - and say a year and yet the government still has it's head up its ass - as it hasn't actually implemented any changes yet. It has announced some, then cancelled them, or announced a review or report or committee but to date nothing has actually been done.

So those moaning aobut negative equity should shut up and just be thankful they have a house and focus on making sure they pay off other debts as much as they can and save money. Stop buying crap they don't need and tell their children no they can't have whatever it is they have decided is vital or tell their kids to get a part time job and save up for it.

I've no sympathy for the negative equity moaners.