Real Estate in 2016 - Part 2
I have been a resident
of Spain for much of my life. I was resident in Portugal for a
decade and a half. Currently, I am living in Malta. I have
traveled extensively, and everywhere I go I check out the real
Iíll deal with the real disaster zones in the next part of this
mini series, but letís look generally at real estate markets
with a brief look at whatís happening here in Malta.
In the US markets have rebounded, but this has happened against
an alarming background. Wages in the US adjusted for inflation
are still at the same level they were in 1970. That doesnít bode
well for continued rises in real estate prices.
According to the government statistics average wage rises are
currently in the 1%-2% range. Sadly, despite the government
figures, real inflation in the US is hovering around the 7%-10%
range. The official figures are taken using the old government
indicators which were used before the government decided to
massage everything. Whatever the government might say, a person
has to pay the electricity bill, the rent, and medical bills,
and one still has to buy food. None of these items is taken into
account when compiling the current price index.
If your average person is getting a rise of even 2% a year when
the real cost of living is going up by at least 7%, and maybe
more, then there is no margin for increasing spending, and
therefore there is no real room for much in the way of house
price rises. I donít see house prices rising much more in the US
in the near term.
In the UK there is a debt problem. Personal wealth has not risen
significantly since 2008. Sterling is likely to suffer a
devaluation when the new Special Drawing Rights (SDR)
calculations come into effect next year. The sterling balance of
the SDR basket has been cut from a little over 11% to just over
8%. Thatís a considerable drop. Investment bonds will have to
take that cut into consideration when rebalancing their
portfolios to allow for the Chinese Renminbi to be added to the
basket. That will mean less demand for sterling, and a
consequent drop in its value.
Sterling will also no doubt suffer a certain decline as the
currency wars continue. Unfortunately, this will make any
cross-currency transactions particularly risky. Should you buy
in the eurozone with sterling? Will the euro continue to plunge?
Yes. However, the answer could also be No. Will sterling plunge
more? Maybe. Who knows?
This continuing situation will make purchasing property in
Europe a hazardous affair. I donít recommend. I think you have
to stick to one currency. If your money comes in sterling, buy
in the sterling zone. If it comes from the eurozone, buy in the
eurozone. This way you eliminate one form of risk, and risk is
the last thing you want in your portfolio at the moment.
There are also serious problems in buying anything in the
eurozone. There is now a very real question mark over whether
the currency can survive in its present form. There is also the
question as to what form the relationship between the UK and the
Eurozone takes after the referendum. I intend campaigning for
the UK to leave. The Eurozone in its present form, and taking
into account its projected form, is IMHO unsustainable. Heck,
the English, Irish, Welsh and Scots get on after a fashion, but
scratch the surface, and there is a lot of animosity waiting to
explode. This sort of tension exists the length and breadth of
Europe. A federal Europe is an idea held together with
sticky-tape. And what happened to the idea of democracy? We have
a political system derived from Magna Carta. Are we to ditch it
to be ruled by a bunch of civil servants in Brussels?
A lot of us will like the French and the Germans a lot better if
we donít have to do what they tell us to do. As I live all over
the place Iím always surrounded by foreigners. They are,
generally speaking, nice guys. But donít tell me I have to have
a bidet in my bathroom. And donít tell me I have to eat straight
bananas. And certainly donít tell me what laws I have to follow
when I thought I voted for an MP, who now appears to have to do
what someone Iíve never heard of decides in Brussels.
This is all going to come to a head, if not next year, then most
certainly in the next few years, and any unraveling, and there
will be unraveling, will not be pretty.
For instance, I know literally hundreds of people who have
bought property abroad, and when their circumstances have
changed, have been unable to sell, or who have had to sell at
fire-sale prices. They should not have bought in the first
Iíll do the maths once more.
Take any market in any country. Once you have a different
currency you have an exchange rate risk. Why add risk into an
already risky world?
Why buy a property at an inflated price? If you are a foreigner
you will be buying at an inflated price. Locals buy at local
prices. Locals get paid locally. They get local mortgages. If
you are sensible you will first find the average wage for a year
in your chosen area. Multiply that by four and you get a base
mortgage affordability figure. Now add twenty per cent of that
figure (your deposit) and you get what should be an average
price for affordable property. How much more than that are you
being charged? Do the maths and frighten yourself. It may bring
you to your senses.
Now when you sell you have to sell to a foreigner to recoup if
possible the exalted price you originally paid, so you have just
reduced your market to a fraction of what it should be. Clever
Now look at the real cost of a purchase, not the price.
Letís keep it simple. Suppose I have £100,000. I can buy a
property in the UK and rent it out to give me an income. The
return should be between 7% and 12%. Letís be pessimistic and
keep to the lower figure despite the fact that I get offers of
investment properties at 10%+ every week. Your money invested in
the UK now produces you £7,000. Take 10% off that off for
maintenance. Letís be pessimistic again, and say you now have a
disposable income of £6,000.
Okay, now sell that property and buy a flat in sunny southern
somewhere. You now donít have the UK property, nor the income.
Thatís called the opportunity cost.
Okay, now buy a nice apartment for £100,000, or Ä140,000. Thatís
roughly the going rate at the time of writing. Now add the
running costs: local tax, repairs, etc. Those will set you back
annual £1,500 minimum straight away. So, although you now own
your own property, it is costing you.
Why not do as I do. I keep the UK place, and pocket the income.
I go out and rent a nice place. If I change my mind I can leave
after giving a monthís notice. If I like it, I stay, and pay for
a two bed apartment. I am currently paying Ä400 a month all
Oops, letís back-track. I forgot to add in to the purchase costs
the cost of electricity (say Ä50 a month), & wifi at Ä40 a
month. That adds more than Ä1,000 to your costs every year if
you bought, but not if you rent.
The purchaser owns an asset that is difficult to sell, and has
an annual extra cost of about £2,500, and is not likely to
appreciate in the near or even the mid future (look at the sheer
numbers of properties already on the market in Southern Europe).
It certainly wonít appreciate quicker than a property in the UK.
I, as a renter, on the other hand, have a financial situation as
follows. I have an income of £6,000. I also have rent to pay.
That equals just under £4,000 a year for an unfurnished, but
fully serviced 2 bed apartment.
Letís say you even have to pay Ä600 a month for your pad. You
can get such deals anywhere except in the luxury zones at that
price. That will set you back Ä7,200 a year. That is still less
than your £6,000 income from your UK rental, so why would you
As for the rental figure I have just quoted, look at this. Up
the road from where I live in Malta is a real estate office. I
can rent just about anything from Ä400 a month. I have my eye on
a 3 bed penthouse apartment for Ä550 a month. Even at a
conversion rate of 1.30 thatís a cost of £5,000. So you get to
keep your UK property. You have a penthouse flat in the south,
and an extra £20 a week to bolster your pension.
If you get a decent buy-to-let return of 10% (which is easy to
do), you get an extra £80 a week to add to your spending money.
Buying a holiday/retirement home abroad? Thatís for those who
are mathematically challenged. Donít even think about it. It
makes no economic sense, and ties you down. And the older you
get, the less you feel like cutting the grass or repairing the
plumbing when it goes wrong. I just ring up the landlord. That's
the way I like it.
Mind you, I am currently living in a four star hotel. My current
'rent' is Ä42 a day for a two bed, two bath serviced apartment,
with indoor and outdoor pools. My bedroom is 4m by 5m, and my
living room is 5m by 6m, so it is hardly cramped. My housing
costs therefore are roughly £1,100 a month, with all facilities
thrown in, including staff.
That's a weekly rate. For a six month stay my 'rent' would no
doubt be less. And remember: no rates bill, no electric bill, no
pool maintenance, no wifi cost. And when I feel like moving
somewhere else, I give a week's notice. It's the ultimate
timeshare but without someone else controlling it.
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