Economist defends claim about mortgages

UCD ECONOMIST Morgan Kelly yesterday gave a detailed defence of his claim this month that €11 billion in mortgage loans were given out at the height of the property boom to “high rollers”.

Prof Kelly told an audience at the Kilkenny Arts Festival that the loans that particularly concerned him were interest-only mortgages given out to “lawyers, solicitors and estate agents at the peak of the bubble”.

Estimating 10,000 such loans were advanced on properties worth €1.1 million each, Prof Kelly said on August 6th “that is € 11 billion in loans to these high rollers, most of whom couldn’t buy you a cup of coffee now”.

Yesterday he told a meeting of the Irish Society of New Economists in Dublin that this “anecdote” had “taken on a life of its own”.

He had been called “irresponsible” for using it.

“I read this in a newspaper a year ago, it has to be true,” he joked.

Prof Kelly said he had since used econometric calculations to analyse how many of these large investment mortgages there were, concluding that the anecdote “seems to be correct”.

There was a “tail” of extremely large borrowings, he said.

He predicted “very large losses” on these properties which was “bad news” for the banks and taxpayers.

Yesterday he said the investors probably took out more than one mortgage so it was 10,000 mortgages not 10,000 people who owed €11 billion.

Prof Kelly also calculated that two-thirds of investor loans were interest-only.

“These interest-only loans seem to concentrate among investors, and my guess would be this is large properties.”

This large number of interest-only investor mortgages was “ bad news” for the Irish banking system and the taxpayers, he said yesterday.

These investors “typically bought property that was designed for investors”.

Shoebox apartments “were not designed for anyone to live in; they were designed simply to be bought for investment purposes”.

Prof Kelly predicted “very large losses” on these properties.

Demand for property was driven by the flow of lending from banks. “The flow of lending to these investors is only 1 per cent of what it was back at the peak,” he said.

“There is no demand for this stuff, so I think there is going to be very large losses on these things.

“That is bad news for the Irish banks and the Irish taxpayers, if we were solvent,” said Prof Kelly.

“But ultimately I think this is bad news for the ECB which is keeping the Irish banking system going and probably ultimately for German taxpayers.

“This has gotten so bad we can’t pay it,” he added.