December 12th 2010
What to Watch Out for in
2011
If you are considering buying
real estate some time in the new year, what are the things you should
be looking out for?
This article is mainly for those who think they can make money out of
real estate. For those who want to buy in Southern Europe because they
just want to move south, retire, relax, or whatever, you can ignore
some of the things I say, because you wont be buying an investment, but
a lifestyle. That's something different altogether.
Remember what I've already said about current conditions. We are
centred in Western Europe. Housing prices have risen from dire levels
to about as high as they can get relative to current wages and
accumulated wealth. They are not going to repeat that rise. What will
happen is that prices will rise and fall with economic conditions.
Conditions are currently bad, so prices should fall. They will fall.
Someone looking for capital gain should stay out of the market until
prices are on the floor, and beginning to rise again. Then you buy and
hold.
Remember, real estate is an investment for the long term. That means
you should expect to be invested for a reasonably long run, maybe seven
years to get a decent capital gain. You can then expect to be out of
the market for a long time, probably another seven years. There is no
hurry.
First warning: dont
listen to anyone telling you there is "a window of opportunity, and
that it will soon be closing". That is not true. It is hype to get you
to part with money. Dont fall for it.
Historically you will find that property as an economic indicator lags
everything else. The economy will recover before property prices rise.
It has to be that way. People buy when they feel rich, and they have
money. They only feel that way once the good times have returned. Maybe
two years after that they'll pour back into the property market. You
will always have plenty of time.
The way to make money is to buy low. Most people buy at the top of a
market, and when it falls they panic, and sell. Serious investors do
the opposite.
Never buy off-plan in a mature
market. If you want to buy off-plan, invest in Brazil where the
market is tearing along at a break-neck speed. Towards the end of the
last bubble off-plan properties were being advertised all over Spain
and the Algarve at twice the normal resale price. They were advertised
as being discounted. Desperate developers are still trying to pull that
one. Dont touch them.
The way to deal with any pricing situation is to look at the resale
prices of similar properties in your local paper and compare them with
the discounts offered by developers. Those discounts are usually
invented.
Dont ever trust bank valuations. Banks are out to make a profit. If
they have a developer on their books who is into the bank for a rather
hefty development loan, and the market has collapsed, they have a
problem. They need to solve that problem, and the easiest way is to
look for a bunch of suckers to come along and take over this
development loan. At the very least the bank will have spread the loan
risk among a bunch of purchasers. They want you to sign up. They dont
care whether their valuation is phoney.
Put this another way. Look at dozens of ads in the press. Get a feel
for the real value. Then offer less.
There is no such thing as BMV
(below market value). Market value is the price you buy at. It cant be
below that price. It is only at the price quoted because no-one will
buy at a higher price, so it is the market price. Forget the so-called
valuation. The market price is the price the seller can get. If it's
lower than a surveyor's valuation, then the surveyor needs to wake up
and get his prices right. Dont get fooled.
There is a particularly difficult decision to make at the moment
concerning mortgage payments. Interest rates have never been lower.
This means you can borrow more than you would have been able to do
three years ago. This is a very dangerous situation.
I usually advise my clients to buy when interest rates are high but
steadily falling. Let me explain why.
When the economy of a country goes south, and times are hard,
governments borrow to pay their debts, and banks clam up, and interest
rates start to rise. This makes borrowing more expensive so you now
have two reasons why property prices will fall further. First, people
feel poorer and wont chase up prices. Secondly, mortgages cost so much
more that people simply cant afford them any more, and they have to
sell. More properties coming on the market drive the market lower, and
prices keep falling.
When the economy turns round interest rates start to fall, and people
start to feel better off. House prices are on the floor, so you can buy
cheap. As interest rates fall your mortgage payments lessen, so more
people can afford to buy, and the price of your investments goes up, so
life is all sunshine and short skirts. That's the way to invest.
Do remember, a 2% rise in interest rates leads to a 30% rise in your
mortgage repayments. That's serious.
Think back. Only two years ago interest rates were much higher than
they are now. How long before they go back there?
I cant answer that question. I have never lived through such an insane
economic palaver as I am now witnessing. I foresee a continued
political charade being played out as politicians try to control the
uncontrollable. It will end badly, but how and when I have no idea.
What I do know is that interest rates will go up at some stage in the
not too distant future. You need to know you can cope with at least a
30% rise in your mortgage payments, otherwise you will be squeezed.
I dont like risk, so I wont buy in Europe at all unless I know exactly
what I'm doing and have myself covered three times over.
So there is my next warning. Dont be fooled by the ads that tell you
that you can be the proud owner of a brand new apartment for only
€5,000 down. "Only" is a rude word. It's not only €5,000. It is also
the next 25 years paying a mortgage with interest rates higher than
they are now at some time in the future, maybe next year, but dont
quote me on the timing.
Buying real estate as a wise investment for the future is not a good
idea in Western Europe any time soon. I'll tell you when it is.
Meanwhile I'm buying where the action is, and interestingly, they speak
Portuguese over there.
john
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