THE PROPERTY boom has left Irish banks “seriously undercapitalised and probably insolvent”, UCD economist Prof Morgan Kelly told the High Court.

Even if the “serious obstacles” to the transfer to Nama of some €90 billion of bad loans are overcome, it is “unlikely the recapitalisation of the banks will be adequate”, he said.

He also predicted Irish property prices are likely to fall back to mid-1990s levels in accordance with a pattern of some 40 similar property booms.

The current collapse of property sales, despite price falls of between 40-50 per cent, combined with large stocks of properties held by deeply indebted builders, developers and private investors, made it hard to dismiss the possibility Irish property prices could remain below half their peak value “for the next decade or longer”.

In a report presented by ACCBank as part of its opposition to a bid for court protection by seven companies in the Zoe group, Prof Kelly examined 38 property booms in OECD countries between 1970 and 2006, including in Finland and the Netherlands, a commercial property boom in Japan in the 1980s, and a boom in Irish agricultural land in the late 1970s.

All these suggested, once the elevated bank lending which fuelled a property boom returned to its normal level, that real prices returned to pre-bubble levels, he said.

If this occurred in Ireland, prices of residential and commercial property would return to the levels of the mid to late 1990s – half to two-thirds below peak values.

Even if the Irish economy returned to growth, as predicted by the ESRI, it was not inevitable property prices would recover, he added. Data already suggested commercial property, agricultural land and Dublin houses had fallen by 40-50 per cent since early 2007.

Despite this, the property market remained inactive, with transactions, as measured by stamp duty receipts, at 20 per cent of 2007 levels. The “usual post-boom price correction” was likely to be aggravated here by large falls in national income and the dislocation in the banking system and government finances caused by the collapse “of our unusually large construction boom”.

Between 1995 and 2007, real prices of residential and commercial property in Ireland approximately tripled, growing twice as fast as national disposable income, he noted.

Between 2000 and 2007, when nominal GNP rose by 77 per cent, mortgage lending rose from €24 billion to €115 billion, lending to builders from €2.4 billion to €25 billion and to developers from €5 billion to €80 billion.