Real Estate Update-1

We are halfway through the year. How are things turning out?

I said at the end of last year that I expected house prices in the UK to stay much the same, or drop about 5%. So far, that’s how things are going. I dont envisage any change over the next six months.

I said that prices in Spain would drop between 10% and 15%. Once again that is what has happened. It’s happened slightly quicker than I expected, but that pattern will continue. Those of you who read all my stuff will know that I expect the price of an average 2/3 bed flat on the Spanish coasts or the Algarve to stabilise at prices in the €60-70k zone. Anyone paying more than that is throwing money away. I have noted that prices have already dropped to €75k for two bed flats in some of the tourist destinations. We still have a way to go.

I have also suggested that there has been a change in buying habits and I expect a severe contraction in the holiday home market in Europe. I dont think the retirement home market will change, but holiday homes have become a liability rather than an asset. It’s a market that is over.

I said I had no idea how the euro situation would pan out, and I still dont know, except that I did foresee politicians hanging it out (kicking the can down the road — extend and pretend — or whatever terms you prefer). That is how things are going. How long this mucking about can go on I still dont know, maybe another year, maybe more, who knows.

One thing is clear, things are not getting better, they are getting worse.

At the end of last year there were rumblings that Italy’s largest bank was on the verge of collapse. It’s been propped up, sort of. There have been worries that France is bankrupt, and Spain is too. However you look at it the whole thing is a total mess. That is not a good basis on which to do business across frontiers, or to get involved in property dealings.

The UK is no better off. The country’s debt equals its entire annual output. That’s suicidal. The traditional view is that once the figure goes above 90% you are on the road of no return. Maybe the country can work its way out of the mess. Unfortunately, the trading partners on whom we depend are broke. You cant increase sales to people who have no money. That spells a long period of languishing economic patterns. We are dependent upon the people using that pesky currency the euro, and the euro is losing value on a daily basis. As it loses value so the UK loses export cash, and so the £ looks more and more frail. In this situation we all go down together.

Let me go back a bit. The average boom period for the UK property market is about seven years. The average hiccup period is about 2/3 years. The average full-on property crash lasts 7-10 years. This situation is worse than that, thus we are looking at more than ten years to get things back on track. At one stage I suggested 2015-2020 as a likely period for the return of a positive housing market in the UK. That’s a guess and so isn’t worth much, but if asked to guess now I would say that is looking increasingly optimistic. A return to the good times much before the end of this decade is unlikely.

Let’s have a look at some simple maths. You all know I love trying to make figures stack up.

Because of the abnormally low interest rates set by central banks across the world, savers are having a hard time. That means money is being taken out of banks and put into other areas to get better returns. That is causing bank assets to drop drastically at the same time that their securities (mainly real estate) are losing value. That means the whole banking system is on skid row.

Remember we live in a capitalist society which rests upon a solid banking system. That means our whole economic way of life is threatened. That is not an academic matter, it’s serious.

The entire developed world’s banking system and currencies are flying by the seat of their pants. Put another way, we have no security of value anywhere in the western monetary system. We are all betting blind. It’s fun late at night playing contract whist and bidding blind, but it isn’t much of a way to win tricks.

I cant possibly deal with this whole question in one short blog, so next week I shall bombard you with a whole list of frightful figures. I dont want to frighten you, but as I never tire of saying, the bad news is more important than the good news. If you have the bad news you can at least prepare yourself.

john