A NUMBER of officials in the Department of Finance consistently warned about an over-heating property market during 2005 but their warnings were rejected by more senior officials.
Documents seen by The Irish Timesdisclose that draft speeches and parliamentary answers reflected the concern of some commentators about the introduction of 100 per cent mortgages and about house price inflation.
But these were edited by more senior officials to reflect a more benign view that the market would experience a “soft landing”.
The Nyberg commission, which examined the causes of the banking crisis, also noted that some officials in the Department of Finance had raised concerns but their views were ignored.
Documents show that early drafts of replies to dozens of parliamentary questions, as well as ministerial speeches, on over-heating in the housing sector as well as 100 per cent mortgages included material that forecast an outcome other than a soft landing.
But the material was later amended to reflect the official view of a soft landing. In early 2006, one draft for a ministerial speech included an extensive passage from the ESRI’s medium-term outlook. It also predicted house price inflation during 2006.
However, more senior officials edited out those references on the basis that it sent out the wrong message, although the concerns were subsequently borne out.
“This type of material is not appropriate or suitable for a ministerial speech,” wrote a senior official. “It is positively alarmist in tone in some areas . . . Similarly, I don’t see why we want the minister [Mr Cowen] to make a statement to the effect that house price inflation may continue to accelerate in 2006. This is not even accurate in terms of the department’s budget-day forecasts.
“In addition, the minister is not going to devote two paragraphs of his speech [to an extract] from an ESRI report. If the Minister were to make this speech, one can only imagine what the market reaction might be,” added the official.
The note added: “For future use, you might work on a one-pager which refers to the strong performance of the sector and lists the underlying fundamental economic factors underpinning housing demand.
“What can also be included is a carefully worded and nuanced message on the need for all actors in the sector to avoid taking unnecessary risks or something along those lines.” In another memo, a query was raised about a sentence in a proposed speech from Mr Cowen reacting to the ESRI report: “A soft landing is now in prospect [for the housing sector]”.
A Finance official noted that the ESRI had not used that phrase or the word prospect but had said a soft landing was only a possibility.
However, the line was retained on the basis that it represented a view the minister could legitimately take.
Other documents, released by the Department of Finance under the Freedom of Information Act, showed that officially it was cautious about any intervention in the housing market.
“The housing market is a domestic risk factor for the Irish economy. The market is delicately poised and any government intervention could make matters worse. The most likely scenario is for a soft landing,” stated one memo from August 2005.
The documents also included an internal analysis of the effect of 100 per cent mortgages prepared in September 2005. It concluded the development was inflationary, adding, however, that the extent and duration were unclear.
Nonetheless, in meetings in late 2005, the Department of Finance and the Financial Regulator’s office disagreed with the Department of the Environment’s view that there should be intervention on 100 per cent mortgages.
