Nope, this is not about some cultural and intellectual reawakening of the masses. Nah, it’s just lil’ ol’ Brian Cowen is waking up from his slumber… along with the rest of Ireland. It’s as if he were Truman Burbank discovering that a real world exists beyond his Truman Show-esque bubble reality. Welcome to the big bad world.

A friend emailed me a link to an article in the Independent, “Taxman ends mortgage relief for 154,000 ineligible homeowners“. The subject line of his email? – “Good news”. Both of us never jumped on the fabled property ladder and had tried, in vain, to ignore the constant smart-arsed remarks over the years about how people had “earned” so much on their property. I’m sure this was a constant conversational annoyance in any country that experienced a property bubble, be it the US, Spain, the UK or Australia, however, it really focuses your attention on what’s going on around you where you live.

For me, one of the ultimate smart arses, is Ciarán Maguire. He was lucky enough to jump on the property bandwagon in a big way with the right connections just as the credit was flowing in the right direction. His group’s website has been tamed, although I remember cringing as I read it in the past when it seemed to me as being little more than an arrogant platform of vanity and self-worship. There were lines like “one of the Worlds Youngest Chairmen and President of a Multi Billion euro Corporation” and he also shamelessly ripped off Warren Buffet with his rules of investing: “1. Never Lose Money 2. Never Forget Rule #1“. I’d love to know what the balance sheet of the Ciarán Maguire Group is like. I would wager a guess that their debt levels are stratospheric, considering how much leverage would be required for his far-fetched ventures. I digress…

For years, property as an “investment” was seen as a one-way bet. So why could a policy to remove incentives for property investment be “good news”? The establishment had tinkered with the tax system to favour property investment at the expense of other, more productive sectors of the economy. The tax authorities turned a blind eye to widespread fraudulent claims for mortgage interest relief such as claims from people who had bought undeclared “buy-to-let” investment properties which they rented out. The average man on the street firmly believed that property prices simply could never fall.

Residential investment (% of GNP/GDP) *

* Alan Ahearne, Juan Delgado, Jakob von Weizsäcker, How to prick local housing bubbles in a monetary union: regulation and countercyclical taxes, VoxEU.org, 27 June 2008

It was an understandable assumption, because Ireland had not experienced a property crash in recent history, and the authorities blatantly ignored the lessons of property crashes elsewhere with spurious justifications such as demographic trends. I can only imagine how cozy ministerial chats over pints of guinness with their construction and property developer buddies, along with the top brass of Anglo Irish Bank, must have provided the basis of their official policy. The Department of Finance extended tax incentives for property investment and the puppet Financial Regulator left open the credit taps on an already frothy economy. Words to the effect of those chimed by Chuck Prince, former CEO of Citigroup, aptly describe the economic strategy of those holding the levers of power in Ireland and top level mandarins – “as long as the music is playing, you’ve got to get up and dance. We’re still dancing…“. Ireland experienced a multi-year nationwide céilí.

Well, that was then, and this is now. As property is such a substantial and all-pervasive sector of the economy, the effects are widespread – house buyers (mortgage holders), banks, construction companies, and, in fact, everybody else, as the rippling impact of the combination of the credit crisis, property crash, and economic recession now clearly demonstrates. Another conversation with a friend of mine some time ago who was about to buy his house springs to mind. His reasoning for buying? It has to be a safe bet. If property were to crash, everybody is in the same boat and then the entire national economy would crash along with it. What he assumed, of course, was that a broad economic collapse was highly unlikely. What a prophetic statement that proved to be.

The state guarantee of the entire banking system meant that we collectively “bet the farm“. I also fear that the taxpayer will be hit yet again when the National Asset Management Agency (NAMA) takes over €80 billion of dodgy loans off the banks’ balance sheets in return for inadequate discounts.  Some reports suggest that property developers used the same assets as collateral for loans from multiple lenders. What a nightmare it will be to recover anything close to the face value of those loans. The capital injections to date have only been to counter the lack of liquidity due to the credit crunch.

For those who think it is all over, think again. Only now are the inevitable bankrupcies of the property developers starting to hit the banks (i.e. the taxpayer), so we are still in for one hell of a ride. As of 29 May 2009, the already nationalised Anglo Irish Bank requires a capital injection of up to €4 billion due to significant defaults on loans they had issued. They anticipate billions more in losses if property markets fall by just another 10%. It is likely to fall by far more.

Getting back to the article, the government has made a shrewd move by freezing existing mortage interest tax relief and “forcing” mortgage holders to re-apply. Hopefully some of those smart arses are shaken out of their comfortable complacency and are obliged to pay their dues. That, however, is not the main point. The main point is that it removes an artificial and informal stimulation of the property sector by enforcing (for once!) existing tax rules. Another important aspect is that it will allow the state to collect more taxes to help fill a gaping hole in the national budget. A common attitude is that if everyone is involved in tax-avoidance, then it’s ok. Well, this is one hell of a way to force cultural change in Ireland. It’s only the start, of course. Another important, and as yet overlooked, element of reform is the introduction of property tax.

Contrary to his namesake “Biffo” and all his past failings, I’m sure that Brian Cowen is a fairly competent political leader. The trouble is that he’s been permanently stained by the dirt that slipped off Bertie “Teflon” Ahern after having been cozily snuggled up in bed together for so long. It must be said that Brian Cowen, and of course, Brian Lenihan, who, as Minister for Finance, must have had a hand in this, are finally making sensible policy decisions. The only problem is that this is yet another case of shutting the stable door after the horse has bolted. Fianna Fáil consists of a bunch of Truman Burbanks waking up to reality.

They’re now trying to fix the problems they created (as members of the Bertie bunch), so they’d better get it right.

Good morning… and in case I don’t see ya, good afternoon, good evening, and good night!