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
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
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
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
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
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.