House Prices in the Algarve
The local newspaper tells us the Portuguese property market has reached
bottom, and the green shoots of revival are at last showing.
I've asked them where they buy their happy pills because the rest of us
would like to take some and get high as well.
In fact, how often do we hear these reports that now is the time to
buy? We heard it back in 2006 when Spain's property prices has
supposedly bottomed out. Then again in 2008 just before the big crash.
We heard it again two years later, and now the idiocy is upon us again.
By all means buy. You will later regret it. We aren't out of the woods
yet, not by a long way.
There is no recovery in property prices. There will be no recovery
within the foreseeable future. I have said that before. I will keep on
saying it. Here are four fundamental reasons why house prices are not
about to rise.
1 The inventory of empty homes is so large it will take a
decade to shift. Until it is shifted there will be no recovery.
2 Prices have to come down to realistic levels. Average
wages in the Algarve are below €1000 a month. That means average house
prices cant be higher than what people can afford. At 4 times income
(the maximum you can borrow) a mortgage of 80% on a property cant be
higher than €48,000. That means any average property priced higher than
€60,000 is too high. I am talking about an average two bed apartment.
If you want to pay tourist prices that's your problem. Obviously an
average apartment is not a luxury apartment in a fancy development, or
something that is front line. For them, a 50% uplift is reasonable
unless there is something spectacular about the place, in which case
the sky's the limit.
3 Prices have to be comparable. If you can rent a place for
€400 a month (I'm currently paying that, which includes all services,
and I'm a fussy so-and-so which means my place is very nice), then the
cost of owning a place shouldn't be significantly more than that. If it
was then people would't buy, unless they are fools, and we know about
fools and their money.
Let's do the maths. If you spend €60,000 on an apartment you no longer
have that money so there is an opportunity cost. That should be set at
10% because anyone can get 10% return on their cash safely in today's
environment. Just a quick look at dividends on ultra-safe stocks gives
me 9.7% on one, 11.2% on another, and so it goes. In any case, you
would value a business (renting out a flat) at ten times earnings. Take
my flat. Ten times €400 a month equals €48,000. That's what my flat is
The opportunity cost of €60,000 is €6,000 a year (what you dont get if
you sell those dividend producing shares). That's €500 a month. The
sane person invests the money, gets the dividend, pays the rent from
the dividend and spends that extra €100 a month. The owner of a flat
doesn't have the cash, and still has to spend money on IMI tax,
repairs, renewals, insurance, and everything else.
In short, house prices are still way too high. They are not going
higher any time soon, they are going lower. When the average apartment
sells for around €60,000 the market will have reached parity. It will
probably undershoot that figure.
I have been predicting this reversal for the past five years. I monitor
figures in three locations. I am now finding that the prices are
hovering around €70,000 across the border in Spain (down from €135,000
five years ago), and they are still falling. Prices in the Algarve have
always been more inflated than in Spain, so they are lagging, and so
have further still to fall.
4 For house prices to rise incomes have to rise also. They
are falling. Not only that, but the government plans more taxes to hit
property owners. You will in the future have to pay tax on the rent you
aren't paying for living in your home. Nice isn't it? You tell me what
the tax will be on €400 euros a month that you aren't getting. Now tell
me how retirees are going to pay it out of their pension. Now look me
in the face and seriously tell me house prices are going to rise.
It's simple maths really, but then most people aren't very good at