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Analysis of the property markets. 2016

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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 estate markets.

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 place.

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 stuff.

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 inclusive.

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 buy?

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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Part Three >>>

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