TCD professor admits being wrong about housing bubble


PROMINENT TCD academic and financial commentator Brian Lucey has accepted he wrongly forecast three years ago the Irish housing market would continue to grow at a “modest but still significant pace”.

However, he said his basic position seemed reasonable, based on the available data. He said it did not undermine his robust criticism of the Government in recent months over its handling of the crisis facing Anglo Irish Bank and its decision to establish the National Asset Management Agency (Nama).

In an analysis prepared for mortgage company Homeloan Management Limited in December 2005, Prof Lucey dismissed the notion of an unsustainable property bubble.

He also identified more scope for increased mortgage lending by financial institutions by means of subprime mortgages, 100 per cent mortgages and equity-release loans. However, he did caution that subprime lending was likely to be constrained in Ireland because of the absence of a repossession culture.

An associate professor of finance at TCD, Prof Lucey has been an outspoken critic of the Government’s approach to the banking crisis. He has argued for nationalisation of the banks rather than the Nama approach. He has also called for the troubled nationalised financial institution Anglo Irish Bank to be wound down.

“The basic proposition at the time was I was not sure if there was a bubble,” said Prof Lucey. “I thought that there would be modest growth for the medium term. It was based on the data that was available. It was also based on where economy was and seemed to be reasonable. In retrospect I was wrong. Hindsight is 20-20.

“That is life. Does that invalidate the analyses I am doing now? Not necessarily. We will know for sure [about Nama] in 10-15 years.”

Asked what his response would be to people who would criticise him for being prescriptive now when he was wrong then, he replied: “This is not physics. It’s a social science. People are looking for more certainty that can be given. I do not think what the Government is doing is right. There is a consensus that some of what they are doing is right and there’s consensus that some of what they are doing is wrong.

“I think we need to be cautious and humble. One of the things that people outside academic circles say is that we are flip-flopping and changing our minds. We are advancing propositions and seeing how robust they are. Sometime you get them knocked down and then you move on.”

Prof Lucey, referring to his identification of a gap in the market for subprime mortgages, said there were some good aspects to subprime despite it becoming “as popular a term as Hitler Youth”.

“The whole issue surrounding subprime was that it extended the base of people who could invest in housing. While accepting that some should never have been given loans, it did open up the market to people who were minorities . . . who had [previously] paid much more or had difficulties acquiring mortgages.

“The growth of subprime and other factors gave them a foot on the ladder. Nobody is saying that 100 per cent of subprime [mortgages] will default.”Dr Lucey said that “financial engineering” needed both regulation and education.