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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 worth.

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 maths.


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