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Analysis of the property markets and where they are likely to be going. -- Portugal; Spain; Southern Europe.

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Retirement/Holiday Homes in Southern Europe

Someone recently asked me about the Portuguese property market. I do make regular updates on the situation, and I'm sorry to say that nothing is improving. It's beginning to get tedious to have to constantly trot out bad news, and it's one of the reasons I no longer call Portugal "Home".

As regular readers of my blogs know, I trotted off to Central America at the end of last year, and fell in love with Nicaragua. Apart from Costa Rica, which seemed to be mired in disaster and desolation, I found a part of the world where the people seemed to be happy, well-fed, and living a more robust and enjoyable life. I prefer to be surrounded by happy faces rather than doom and gloom.

Those of you who paid any attention to the BBC's absurd item on Portugal's financial status must be wondering what the problem is. I can only assume they got the office boy to write the article. It was inane in the extreme.

First, the general picture. The 'kill everything that moves' economic policy is set to continue, with higher taxes, less encouragement to business, and a general retreat towards an even more hermit-like set of policies set to take the country back into the past. The peasants are getting poorer, and the dependency ethos is gaining ground. Over easter the tourist towns were largely empty, and according to the hotel booking sites hotel bookings were running at an average percentage in the mid thirties, which is rather low for off-peak, and can only be described as disastrous for peak holiday times.

It is not encouraging that political blunders continue at a cracking pace, and corruption is rife throughout all sectors of the country.

In short, there are still long faces all round. But what about the housing recovery? Glad you asked.

House prices are still falling, and, as suggested in an earlier blog, they are pretty well guaranteed to fall for the next four years, as banks are forced to sell off their duff inventory at properly marked-to-market prices by the end of 2018. That backlog of stock will keep prices significantly depressed.

Prices have still not reached the level that would make them intrinsically balanced. I mean by that an equality in cost for the property as a home to live in. You can still rent properties for a cheaper real cost than purchase. That makes the choice to purchase an economic idiocy. It also leads to an almost guaranteed lock-in to the purchase as re-sale is going to be difficult at least going on to the end of the decade.

The only valid economic reason for buying would be because prices are going up, and expected to continue rising. Since it's already cheaper to rent that is not about to happen. In any case, why buy into a falling market? You rent till the tide turns, and that is not about to happen any time soon.

In terms of retirement, a purchaser would want to have an exit route should illness, infirmity, or simple change of mind require a sale. At the moment, any such exit is going to lead to a loss. Anyone seeking to move to Portugal should clearly rent not buy.

A question raised is: what should I do with the money from a sale of a UK property? There are two answers to that. First, dont sell the UK property. That will hold it's value. Rent it out, and use the rent to live on and pay your rental costs in Portugal or elsewhere. That will give you a better lifestyle than selling up and buying in Portugal. Older people can benefit greatly from the extra income.

Secondly, if you have capital, invest it. I keep saying that there are plenty of opportunities out there. I dont look at investments that bring in less than 10% plus inflation rounded up. For a UK-centric view that would mean 12%+. I can throw you a dozen safe investments that will pay a lot more than that without even thinking. For a consistent view, have a look at my Big Pension magazine that comes out monthly and concentrates on precisely those opportunities. Here's the link:

But what about the future? We keep being told that the borrowing from the so-called Troika is over and went well.

Obviously the borrowing went well. Why wouldn't it? Any damn idiot can borrow money successfully. The hard bit, the real test, comes when you have to pay it back. Let's look at this calmly and simply.

The Portuguese government cant live within its means. The tax revenues do not cover expenditure, so the government goes to the bond markets and borrows to make up the shortfall. That still doesn't manage to bridge the debt gap so the government has to borrow from the ECB.

From now on they wont have the borrowing from the ECB, so that money suddenly disappears, so there is going to be a bigger hole in the accounts. That means the government will have to borrow from the commercial markets at a higher interest rate. That leads to a double whammy. They wont have the original borrowings, and they will have to pay a higher interest rate on any new borrowing. Perhaps someone can tell me how that is going to lead to the return of the good times.

Conclusion: things can only get worse. I dont want to stick around, but you might like to be there and watch the carnage. To put money into Portugal in any shape or form you have to be a masochist.

What makes this even more dodgy is that I really think that interest rates will have to rise in the not too distant future. The underlying financial system is breaking up. When rates rise the government will have such loan commitments that they wont survive. Taking this argument to its logical conclusion is just too painful to undertake.

I cant see that the situation in Spain is any better. By all means move to Spain, but once again, renting is the preferred option.

The clear message from all this is that whatever mess is coming, your assets would be better off in England than in Southern Europe. Despite this, I am diversifying my assets completely out of Europe, except for some exposure in London, which I dont think will fail in my lifetime.


p.s. Dont forget to check out my Big Pension bulletin:

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