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Buying property in Spain & Portugal

In my previous blog I said I'd devote time to discussing prices of property in Spain. I'll add in Portugal as well, because both countries are, except in one respect, similar.

There are basically three kinds of financial decisions you have to make when seeking to move to another country. The first concerns whether you are simply looking to move house, or whether the purchase is part of an investment strategy, or maybe a combination of both. It will also be important to spare a thought for where your income derives. If in another financial region, be extra careful because exchange rates do change.

The second depends on the answer to the first question. If this is meant to be an investment, or part investment deal, do remember that you are, as I said in an earlier blog, investing in the country of choice, so to a certain extent this also becomes a matter of investing in the country. You wouldn't have wanted to invest in Greece just before that country's crash. You would never have wanted to invest in Turkey.

With Turkish property on your hands you would probably have no chance of selling now, and when (if) you did sell, the local currency prices would represent a nasty dent in the family fortunes.

If you buy into any country in the EU you are buying into the success or failure of that enterprise, but you are also buying into the economic future of the individual country. I did, in an earlier blog, mention the disastrous way the Portuguese escudo dropped in value over the course of about forty years.

I can't predict what is going to happen in Iberia over the course of even the next decade, but it is worth looking at some of the possibilities.

Let's start with problems which don't depend upon the idiocies of politicians. The weather might be an excellent place to start. Difficult to predict, and in the eighties it was clear that central and southern Spain was in distress over a lack of water. At the end of the nineties Southern Spain was literally awash with water, but one thing I have noticed living in Portugal is that this part of the world is getting drier. Is this pattern going to continue, or not? If it does, then the Algarve is going to be teetering on the edge of water starvation very soon. There is a river at the bottom of my garden. I may take a photo to show you what it looks like at the beginning of february. It is what is called a Ribeira in Portuguese, which means it is a seasonal river. The water usually flows from november to June. Since the end of summer we've had half a dozen light showers that freshened the flowers, but didn't sink in, plus three days of reasonable rain. That's all. The only reason the reservoirs aren't running on empty is because last year the tourist season was a half-hearted affair. If things dont improve drastically over the next three months we are going to be on rationing. That will affect the tourist industry, agriculture, and just about everything else. Water is a basic necessity. Portugal does not plan for the future until it has become the past. There are no contingency plans.

The long term forecasts for southern Europe, and especially Portugal, are that the climate is going to get drier. OK, I know, since when did anyone take weather forecasts seriously? but I mention it for what it's worth.

Next, there is the problem of the economic success or failure of a country's industry and exports. Portugal relies on tourism. So does Spain. Both sectors have been decimated by badly thought-out health restrictions. Spain is the worse affected. Both countries are likely to recover, but how long before there is another hit? I cant help you on that.

What about interest rates and inflation?

Interest rates are mainly affected by the ten year Treasury Bond market. That should be rising to counter the inflation levels that are pounding the US at the moment. The US Federal Reserve (Fed) is loathe to countenance much of a rise because of the threat of bankrupting the US government. The Fed is even reluctant to stop bond purchases despite the fact that the stock markets don't really need government support. The real issue is not whether the Fed will raise interest rates sooner rather than later, but whether inflation will cause so much damage that they have to.

Inflation is apparently raging in Northern Europe, but it certainly isn't apparent in Spain or Portugal. Whether that will last is another matter, but there are no threatening inflation clouds on the horizon here at the moment.

However, that does lead me to the problem of house prices.

In Spain house prices have crashed. In that sense maybe now could be a good time to buy, but make sure you don't over-pay. Don't listen to over-enthusiastic estate agents. Look at the market. Look at the sheer volume of property for sale. Last time I bought in a crash I was offered properties at 20,000. They were already down 60%. I offered 8,000, and finally did a deal at 10,000. I could have held to my original offer, but I knew the prices would bounce back nicely without screwing the last pennies from the sale. Property prices in tourist areas in Spain could be in a similar situation at the moment. Don't chase prices.

Portugal is in another category altogether. The prices here are well above where they should be. If you are concerned about price, don't give it another thought, Spain is much cheaper.

There's not much more I can say, but if you want me to dig deeper into this subject just let me know, but do point me in the direction you'd like me to help.

As I check over this article I am aware that the Bank of England has decided to raise interest rates by 0.25%. The really interesting fact is that the minority view (by only one vote) was to raise rates by 0.5%. Rates are clearly headed up. That is going to impact upon house prices. I can't see them rising from here, and in Portugal I expect a reduction, but that will depend on how many idiots keep buying at unsustainable levels.

The argument against what I have just said is that the European Central Bank is looking to lower rates. But that would indicate that the financial stability of the eurozone is seriously shaky. At the moment (but of course this could change) is that the euro is weakening against sterling. We also have the base EU economy of Germany dipping into recession. In other words the EU economies are in trouble yet again. So nothing new there.

Final comment: If you are thinking of moving south, your best plan is to rent for six months and see which way the wind blows.

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