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What Will Happen to Real Estate in 2014?   Part 2

(Please note there is a podcast of this blog should you prefer to have it read for you. Look to your right, and click the link.)

In part 2 of my annual review of the property markets I will look at individual markets, and then, in Part 3, I will look at a few macro-economic situations which I think will have a bearing upon real estate in the medium term.

House prices rose by 3.8% over the past year according to the official stats. That's higher than I expected, and the rise can be attributed to the government support for first time buyers, which has artificially raised prices. Most of the rise was in the London area. The figure for the rest of the country is 2.1%, which is still about 1% above the rate I expected.

Inflation is still high at 2.2%, with that figure expected to rise over the next quarter. As a contrast, the average rate of inflation across the Eurozone is only 0.7%. A rate three times our biggest trading partners is not good.

Wage rises are running at 1.4%, so in real terms wages are still falling. It is now the case that real wages have been falling for longer than at any time since the 1920s. For the past twelve years inflation has outstripped wages. With unemployment at 7.7% there is no incentive for employers to raise wages, and with the economy only just into the plus there aren't the profits to support any rises either, or the means to raise prices to pay for increased wages.

The maths are telling us that house prices should not be rising, and if they are, then this can only be a temporary measure. Maybe things are improving slightly, but only by a minuscule amount. If the economy starts to move forward at a brisker pace and wages start to rise, then things may well improve, and price rises will rest on a more solid base. At the moment, however, that is not the case. You cant spend more when you are receiving less.

I like to use the Affordability Index to gauge whether prices have room to rise or not. There are two ways of assessing this. My preferred method is the psychological one, which is not as scientific as the second version, but it reflects more how people behave rather than how they ought to behave.

My own checks have shown that in various parts of the country people have a different attitude to the cost of a home. Here are the current figures for first time buyers.

In the North and Scotland you can expect the affordability index to run as far as 40% before people stop chasing prices. In the summer (the most up-to-date figures I can find) the percentages for northern regions were in the mid to high twenties. In short, there is plenty of leeway for prices to rise before people find themselves up against it.

Figures, though slightly higher, are broadly similar across the whole country. Even the South-East returns a figure of just under 40%. As a guide, that figure can go as high as 65% when the market is on a tear. London can reach 60%, whereas it is currently in the low fifties.

The figures I use from Demographia have not been updated, so I will have to revisit this part of my analysis next year. All I can say with the figures I do have, is that prices do still have room to rise, but whether they do or not will depend on any political manoeuvrings, and on the state of the economy, and whether that is translated into higher expectations from the general public.

I am of the opinion that we will have yet more of the same, or a slight rise in prices, but no really significant moves unless and until the economy starts to improve, however, I would prefer to have the other Affordability figures before making a more definite pronouncement.

As a rule of thumb, if prices are above the cost of obtaining a standard mortgage (3 times earnings +1) then house prices are too expensive, and will not rise more than a smidgeon.

Across the channel things are not looking rosy at all. This time last year I forecast falls in France, and I have been proved right. Prices have actually been quite erratic, with rises in some places and falls in others. Herault, down in the south, has seen good rises, whereas the Loire area has seen nasty falls. On balance, the movement has been down.

France's socialist system is still on course for a massive dysfunctional catastrophe, which means that long term, France is not a good prospect. I would not entertain buying here at all at the moment.

Spain and Portugal
Both these countries have seen further significant falls as expected. I expect those falls to continue. 10% falls a year seem to have become the norm in this part of the world, and there is nothing to stop those falls.

There has been no improvement in the underlying econometrics. Over supply is so huge that, as I have noted in previous years, this will take a decade or more to shift. At least Spain has a moratorium on new builds. Unfortunately the lunatics in Portugal are still building. This means that in about ten years time when the Spanish market may start to recover, the Portuguese market will still have a massive overhang of unsold properties.

In many places my prediction of 2/3 bed apartments for sale at €60,000 has been achieved. I expect €50,000 to be the next target. I recently saw new apartments advertised in the Algarve at €145,000. That's roughly twice what they are worth, and anyone buying at that level is, not to put too fine a point on it, completely off their trolley. Those were the prices in Spain 3/4 years ago. This market wont turn round in that time, so expect the Spanish prices to be achieved in Portugal sometime before the end of this decade. Why would anyone in their right mind spend that money when they can pick up deals for half that price across the border? Portugal prices are still way too high.

Also, please note that in Spain nearly a third of the -25 group is unemployed, and the general rate of unemployment in Andalusia is over 30%, and still rising. That's an unsustainable situation.

This time last year I forecast no change. I was, of course, right, but what about this year?

I did a small recce across Southern Italy and Sicily at the end of the summer. I was deeply shocked at what I saw. Prices ranged from what I would regard as normal, right the way down to dirt cheap. I came across many ruins for sale for less than €10,000. We are approaching Bulgarian country prices.

This part of Italy is, economically speaking, on its knees. The tourist trade is almost non-existent, and holiday rentals are a disaster. The rental season is June to August. I went in mid september and the place was closed for the year. Beach after beach was deserted, beach bars and hotels shut, and an air of desolation everywhere.

I also noted the sheer quantity of hotels that were closed, unfinished, or abandoned. This part of the world is okay if you want to buy something seriously cheap, but you may find life a bit lonely if you dont speak and eat Italian.

The populace fear mafia control in parliament, with corruption rife, and spirits low. Italy at the moment is at a low ebb, and I dont think now is the time to be looking in that direction. I fear some kind of collapse may be just around the corner.

Further east, Greece has supposedly had its collapse. I have not been on the ground over there, so I can only go from hearsay, which is not my style. If you can pick up something very very cheap then that may be a good idea, but there is a serious long term problem in Greece.

In the first part of this analysis I did mention the question of population and employment. Greece is one of those countries where the population is way too large for the jobs available. Over two-thirds of the under-twentyfives are out of work. That does not bode well for anybody in Greece. If you moved there you would have to take the view that selling up at a later date would be a fraught situation. You would also have to enjoy living in a country where the outlook is bleak, and the populace dissatisfied.

Might I suggest Crete, rather than mainland Greece. I haven't been there since I was a kid, and remember a lady walking into the shallow waters of the Mediterranean somewhere on the south coast, with a guitar slung around her neck. She played and sang into the evening. It was Joni Mitchell.

That leaves that other disaster zone, Cyprus. This is an odd area. In the short term it is another right-off. In the longer term there are possibilities. Let me explain.

Last year Cyprus was heading for a major banking crisis. I did warn my readers. The whole system finally imploded earlier this year. The place was a haven for money laundering, and there were a lot of mafia funds in the system, and the sheer size of the financial sector was out of kilter with the underlying economy. The crash was inevitable.

As of six months ago the country was down and out. However, that isn't the end of the story. The area to the east of the country is awash with oil under the sea. That is easily recoverable, and will underpin the country's finances for some time to come. This means that although the short term outlook is bleak, the medium term looks brighter.

The bad news is that the bailout came largely from Russia, which has taken a lien on the oil. This means the country has mortgaged it's future income to pay for the bust. That will be a drag on the economy for at least a decade. I dont think I'd be in a hurry to rush in.

Maybe I'll go to Crete next spring and do a recce to see whether there are any deals. At the moment I am investing in many things, but not a penny is going into real estate anywhere, except in the USA.

The American property market is at sixes and sevens at the moment. There are those who claim we are at the beginning of another uplift, and those who are saying we have come too far too fast, and are headed for another fall.

I dont know where America is going. Socially and politically it looks to be a mess. On the other hand, the future of the economy seems to be well taken care of with all the cutting edge technology that is bursting out of laboratories across the country.

I have taken a small position in the hotel business in the Bakken oil zone in North Dakota. The returns are good, and the oil will underpin those returns for some decades to come.

I am not tempted to move into any other zones.

I still prefer to keep away from the Middle East. Things have worsened in this sector since this time last year, with the religious wars raging within spitting distance of the Turkish border.

I still prefer Turkey in Europe, but you can keep Turkey in Asia, no matter how badly my predictions have turned out for this part of the world. I think I've been shown to be too much of a pessimist in this region, and those who have invested have apparently done rather well. Okay, I have been wrong, but forgive me if I dont change my mind.

The third part of this analysis will contain a short note on the world picture. It will be purely speculative.


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