Sell Detroit, Buy Brazil

See you in Brazil.

It’s interesting that the property markets in the the USA are dominated to a great extent by the drive to sell cheap stuff in Detroit and Florida.

I dont want to talk about Florida, which is a confusing enough place without me adding to the background noise, but Detroit is an interesting case study.

We are being told that Detroit is cheap. Detroit is going to be saved by the government. Detroit is going to get zillions in aid. Detroit is about to be regenerated.

It’s odd, but haven’t I heard all this before? I vaguely remember going to Detroit forty years ago. It was in the throes of being saved by the government, getting zillions in aid, and was in the process of being regenerated.

Hands up those who remember President Johnson’s Model Cities Program? Hmm, not many. It was supposed to be a great experiment in urban planning aimed at improving the lot of black folks in the city.

About half a trillion dollars was poured into the city. Over the next two years a quarter of a million folk moved out, and Detroit started its long decline. Over the last forty odd years Detroit has lost about half its population.

Over a thirtyfive year period it seems the Model City area lost 63% of its population and 45% of its housing units. The place is in fact a model disaster area.

There is a little saying about learning from one’s mistakes. However, no-one mentions what it is that one learns from one’s mistakes. I vividly remember my cousin’s mistakes. I dont want to slag off poor Jeremy. He’s a nice guy, and his mistakes were thoroughly understandable, but his kind of mistake is just what we are all up against at the moment.

Jen was a radio ham. He was seriously into short wave radio, and had masses of gear. He used to subscribe to the right magazines, and used their instructions to build his own radio equipment. Invariably the machines didn’t work. However, he learned from his mistakes. He built bigger machines. They didn’t work either.

One day the penny dropped, and he actually admitted to me that his machines never worked because he just kept trying to make them bigger. I have never come across a politician who admitted a similar mistake.

Central planning didn’t work in Detroit. Okay, tough shit. We’ll make it work this time by spending more money and making everything bigger.

Okay, so it doesn’t work this time, so next time we’ll have to try even harder and spend even more money. No-one seems to get the message that the schemes simply dont work. Making them bigger only makes a bigger mess.

Welcome to the latest spend-out in Detroit. My guess is things are about to get a lot lot worse.

There seems to be a lot of it about. We have similar problems in Europe. There is a problem with little old Greece. The Greeks are bust. Now, let’s count, how many times have they gone bust since independence? Is it ten times, twelve times? I dont know. I forget. They are so regularly bust one cant keep up.

Economically they represent 3% of the eurozone. However, the governments of the eurozone are there to help. They have just pulled out a stupendous amount of money to save 3% of the zone, and in the process, put the whole zone in jeopardy, and so the euro tanks at an alarming rate as more and more businessmen lose trust in the currency, and decide to sell their goods by using alternative currencies. After all, who wants to be paid in three months time an amount which is now 5% less than it was when you signed the contract?

More to the point, who wants to use a currency which supports a country which has been on the fiddle for the past decade. All fiat currencies are paper based. Paper is not worth a lot. The value of paper money is based on trust. Support those who fiddle, and trust goes out the window.

There is a promise on sterling notes. “I promise to pay the bearer the sum of…..” and that promise is signed by the governor of the Bank of England. I dont reckon that promise is worth too much, but it is there, and there is a Bank of England, and a governor. And despite the idiocy of Gordon Brown the UK does still have a few gold bars somewhere in the vaults.

On the other hand, if you get out a euro note you’ll find there’s nothing there. It’s just a bit of paper which is worth what people think it’s worth. In times of crisis, that isn’t going to be much. After all, we dont even know who issued the note. It is a piece of paper backed by a dream.

So, once again, we have a small problem which has been turned into a huge problem by government trying to make things better.

If the wise man does learn by his mistakes, the question is: where is a wise person to be found?

The next question is: will there be a eurozone in five years’ time, and if so, what will it look like?

The third, and most alarming question is: what will there be in those countries where there is no longer a euro? What will their puny little currencies be worth? And what will the local houses then be worth?

See you in Brazil.
john clare

Keeping a foot in the old country

3    Should those moving abroad keep a leg in the home country?

This is the third part of my blog on moving to France (or anywhere abroad).

I deal with this question in my book on property investment, which you can buy online from the Unique site. (

Let me go back to my own experience here in Portugal. I am witnessing a mass return to northern Europe by the English, the Germans, and the Danes. Basically, it is difficult for people used to a high standard of living to make the grade in Southern Europe. You have to take a big drop in income. You get a more relaxed way of life (that is, if you dont live in the Costa del Sol megalopolis), and everything is more local. But that does mean you tend to find the more modern inventions dont actually make it to your doorstep for some time.

I am also finding that older folks are increasingly worried about medical matters. Some medical deals seem to be much better abroad. Others seem to be much worse. I can’t discern a pattern.

Older folks are also more and more concerned about not seeing the grandchildren, and miss their friends. You need to be able to make friends easily. That can be difficult when the culture is different, and you are not fluent in the local language. Dealing with the local authorities is also a bit fraught when you cant gabble off the correct legal language. The minute you start to fumble you start to lose authority, and the other fellow immediately has the advantage.

There is also the matter of relative property prices. If you should ever want to return you could find that the prices in one country have moved so far out of wack with the other that you cant afford to go back. If you keep a property in the UK, then you have to rent it out, which does at least produce you an income stream, but you have to manage the place in absentia.

The other problem is, especially if you are a pensioner, or are approaching pension age, the matter of a problem caused by a drop in the value of the currency in which your pension is paid. When I first came to live in Portugal the exchange rate was €1.50 to the £. It is now €1.25. That is one heck of a drop. A drop of that magnitude puts extreme pressure on your standard of living. On the other hand that means the value of your European home goes up compared to assets kept in the UK. Countering that, however, it means you can probably forget selling your now more expensive home to the English. You will need to think about selling to locals, or at the very least, to people from the euro zone.

Since writing the above the euro has started to nose-dive. Now, of course, things start looking different. It now means your house in the eurozone is cheaper for the Brits to buy, so more folks can actually make an offer. On the other hand you will be putting less euros in your pocket after a sale, and if they have to go towards buying a place back in the UK, then you are in trouble again.

So, do you keep a place in the UK and rent it out? That’s a difficult one. How do you keep an eye on the place when you live 1000 miles away?

It’s taken me a long time to get round to saying that I cant answer the question. However, with those points on the table, maybe you can.

The Death of the Euro

Beware Greeks Taking Gifts

Watching bankers and politicians is better than going to the movies.

How about the ECB (European Central Bank) playing games with the euro? How about that well-known music hall act Pressy Sarkozy? Didn’t he put on a great show? Wow, what a buffoon, maybe the best clown in the business. I wonder what he charges.

So, how can I sum up what happened at the euro summit? Let’s tell it like it really is.

Once upon a time there was a bunch of well-dressed, nicely spoken gents, and a few girls as well. They all went down to the pub, and drank themselves silly. “Put it on the slate” shouted one. As they all looked well dressed and respectable, the barman duly put it on the slate.

Come closing time the barman asked for the bill to be settled. Somewhat startled (the Greek was even enraged at being asked for money) the folks emptied out their pockets, but their pockets were bare. Now the barman was enraged, and he threatened to call the police.

So what did our bunch of down-and-outs do? They sat down at a table, called for pen and paper, and each of them wrote the others an IOU. They then tried to pay the bill with their nice new IOUs.

The barman was still enraged, so the reluctant lady in the band turned to her mate and after a hurried whisper, he went out to the loo. He sat on the bog, and got out his Happy Fritz Printing Outfit, and started frantically printing 500 euro notes.

Sometime later he emerged looking a bit haggard. By now the barman had lost all hope of ever being paid, and had drowned his sorrows in Special Brew. In that state he stupidly accepted all these new wet bank notes, even smiled, and waved the party good night.

Everybody slept soundly. Some even smiled in their sleep. However, as the days went by the barman paid his wages and the brewery in these new smudgy notes. Imagine his surprise when the brewery didn’t like the notes and threatened not to do any more business with the pub. Then the waiters, and kitchen staff found no-one would accept their hastily printed notes either, so they got a job elsewhere.

Now the nicely spoken gents and a lady are not so welcome when they go out drinking. Now the pub is bankrupt, and the electricity has been cut off.

Welcome to the new Europe and its dodgy currency.


Buy land for food

This is part two of my reply to a question about moving to rural France.

2    What is going to happen to food prices? They are going to rise.

First: a bit of school stuff. Malthus, as you all remember from school days, (alright, I know, you were mucking about during history) said that populations always outgrow their ability to sustain themselves. The counter view is that technology always advances sufficiently to counteract that tendency.

So far technology has been kind to us. The combustion engine brought us tractors and a major advance in mechanisation. The technology used in industry brought us further advances in ploughs, threshing machines, etc, and a totally different infrastructure. Then there were the advances in biology; what came to be known as the Green Revolution of the sixties, which raised crop yields quite phenomenally.

However, it is difficult to see where the next revolution is likely to come from. There is nothing on the horizon. In fact, we seem to be edging towards a reversal of things. The more you want to get out of the ground the more you have to put in. Nowadays to keep yields up farmers have to dump vast quantities of fertilizers into the ground. These are made from products that are getting more and more expensive, and so the input costs of food production are rising.

We also have a rising population. We are rapidly approaching crisis conditions. In fact, I suspect we have already reached crisis. Let’s have a look at a few simple facts.

The world population of human beings was 1 billion in 1800. It took till about 1930 for that figure to double. It only took forty years for the next billion to be added. Since then the population of the world has more than doubled. Quite clearly this trend cannot continue without reaching a complete breakdown within a decade or so.

We are told by people who are obviously certifiable that we need more people to support us in our old age. Well, let’s look at another set of figures. The world food production is rising by less than 1% a year. World population is rising by over 10%. Do you really need me to tell you what is going to happen to food prices?

There are two choices. Prices rise, quite considerably. Alternatively more people are going to have to starve.

Already there have been food riots in twenty countries around the globe. Already basic food stuffs have been taken out of the world market. More and more countries are choosing to ban the export of basic food stuffs and basic commodities. Rice stocks are being hoarded by the rice producing nations. That means, quite simply that both alternatives come about. Those who have the money pay more, so prices rise. Those who cant pay more, starve.

It does not help that the US government subsidizes the cost of ethanol, thus encouraging more corn to be diverted from food for people into food for cars. Expect the price of bread and beer to keep rising.

What we have here in terms of food is a very simple situation. Because we started from a low population base the theories of Malthus seemed ill-founded. In 1800 there were a billion of us. We had medieval technology. By 1900 we had considerable mechanisation and not yet two billion of us on the planet. By 1970 there were three billion of us, but we had then had the green revolution. We have since had a doubling of the population and no further technological advance. In short we have a convergence here. The world’s population is growing seriously faster than technology can cope with. The theories of Malthus now look as if they are about to be proved within the next decade or so.

Okay, the food situation is heading for chaos. But what about water? We have a serious water shortage. Odd, since most of the planet is covered with water, and most of it is a mile or more deep. But salt water wrecks the human body, and you cant live on it. Like a lot of things, there is probably enough water, but it isn’t where it’s needed.

It is easy for somewhere like Gibraltar, that has no water, to import it from Norway. But China cant do that. More than half the large cities in China are operating with unclean water. The Gobi desert is lurching towards Beijing at a breakneck pace. I understand that northern China loses an area the size of the state of Maryland every year to the encroaching desert.

In short, you cant go on increasing the world population while the usable landmass is decreasing, the cost of farming is rising, and technologies are producing lower yields. Please note that GM is not the answer as the average yield using GM crops is down 7%. To compensate, there is less loss of crop due to insect ravages. The net situation equals about a 1% increase in recoverable crop.

I am not selling my few hectares of land with a stream running thru it. I will continue to have a home where there is a small population, with plenty of usable land, and a good climate for growing things, and plenty of water. I honestly think urban life is going to get a lot more expensive over the next decade. And I think we are going to be forced to focus a lot more on the important things in life, such as survival.

House Price Predictions

Someone sent me an email from Property Secrets which quotes predictions from the Centre for Economics and Business Research. I  quote a small section from the latest update:

“they have this week said a combination of low mortgage rates and a shortage of new homes being built would push up house prices by 5.3% during the year to an average of £172,500.

It then expects lower price growth of 3.4% during 2011, followed by a strong rise of 9% in 2012.”

I guess we can all dream. I suppose the centre is paid to do predictions. I’m not. However, I have to make a comment.

First, a shortage of new homes will not drive up house prices. It never has, and never will do. I have been in this business over 40 years and I have never seen any evidence to show how a shortage of housing has had any appreciable effect on prices. It’s an old misconception that dies hard. People keep saying it, but dont produce any evidence to back up their assertions.

Everyone and his dog were out buying houses three years ago. Was there suddenly a glut of houses that caused prices to drop? And has that glut just as suddenly disappeared? Big joke. Well, all the real indicators show house prices cant rise much above where they are at the moment.

Let’s list a few simple common sense things.

Unemployment is high, and could well get higher; that tends to lead to lower house prices.
Interest rates are low, but with a budget deficit so high there has to come a time when financing that with bond issues is going to be difficult, and interest rates will have to rise to attract capital. The alternative is for the government to print money to fund the deficit. That will debase the currency, and lead to inflation. Inflation is a tax on wealth. It leads initially to lower house prices, because people feel poorer.
Taxes will rise to pay for the government’s mismanagement of their spending. That will make people poorer. Poorer people dont go out and spend more money.
Affordability is the big issue. Houses are already in the unaffordable range throughout the UK. That cannot lead to higher prices.
Prices are above their long term trend line. They wont go higher when the economy is in poor shape.

I dont do predictions. I just look at what is happening now. It’s much safer. The UK economy is a mess. Traditionally the financial market is the big plus in the economy. That is in big trouble at the moment and will not be lifting the economy for the foreseeable future. The banks are getting even further into a credit lockdown after yet another hit from Greek defaults. And yes, the Greeks will default.

And house prices are going to go up?

“Ha ha”, say I.


Greek debt, and bargain prices

I think it’s about time I wrote another article on the UK property scene.

I would not advise anyone to get into the UK property market at this time. I dont know what will happen after the election (I am writing this in the morning of May 4). I have no idea how the election results will pan out, but one thing I believe is that we have not been told the whole truth about the state of the nation’s finances.

I fully believe Gordon Brown has made a serious cock-up. His government has spent far more during the good times than it should. There was no savings provision made during the good times, so now the bad times are here the cupboard is bare, and the government’s expenses are way beyond their income. There has been no attempt to cut back. Profligate and irresponsible are the only terms that fit the situation.

At some stage in the very near future someone is going to have to do something about this mess. Government spending has to be drastically cut. Taxes also have to be raised, and interest rates will have to go up.

If government spending is cut, that will lead to job losses. The unemployment rate will rise. That will be bad for housing.

If taxes are raised, that will lead to a cut in household expenditure. Quite simply, money will be siphoned out of the family budget. That money will not be available to put towards housing spending. House prices will fall.

If interest rates go up, that will impact on the cost of mortgages. What is important in the housing market is the cost of a house, not its price. If it costs an extra £100 a month to fund your mortgage you will have a problem. If your mortgage is going to cost more, then you will have to lower any offer you make on a house purchase. House prices will go down.

I have said many times before. Buy when mortgage rates are coming down. When they are down they can only go up. I guess they will shortly be going up. Beware!

The Greek mess will not be contained. First; Greece will not be able to cope. My guess is that money is right now being taken out of Greek banks and sent abroad. That will wreck their capitalisation, and make the whole mess even worse. No-one is going to want to lend Greece money when there is a serious risk they wont get it back. I cant see how the government can do anything other than default. When, seems to be the only real question. At the moment companies are worried about exporting goods to Greece as they fear non payment. This mess is real and getting worse. The bailout just keeps the lights on, it doesn’t solve the underlying problem.

Even if the country comes through this, it will be in recession for years. Wait for the default, devaluation, or whatever, and then you might find some interesting buys. But one thing is for sure, there isn’t any hurry.

This mess is going to have a domino effect, and next in line is Spain. There is a fascinating chart in the New York Times showing the cross borrowings in Europe. It is a right tangle of loans that just aren’t going to get paid. This will lead to serious banking lock-up which will be bad for housing, bad for business, and….. just plain bad. You should not be buying in Spain, Portugal, Italy or Ireland. There will be better deals some considerable time down the road.

Now let’s take that bad stuff across the water to the US. For those of you thinking of investing in “bad” areas in the US, you might like to take a look at this letter, which landed on my desk this morning, courtesy of a financial newsletter I receive:

“I am a housing inspector and property manager for much of Detroit,” another reader writes, referring to our observation that stealing valuable commodities from vacant homes is back in vogue.
“I worked with a California couple who bought seven houses from another manager around Detroit. They weren’t happy with his performance or communication. I was contracted to see if I could rehab two of the houses in their portfolio. Upon arriving, I found each house without boards. The house was boarded up prior, but sat for a year. The thieves stole the aluminum porch covers and back porch cover. No biggie, happens all the time. But then upon going inside, I saw the thieves took the bathtub, toilet, sink and every single small octagon tile in the bathroom. Now, that’s a first for me on any level. Every lead window was gone.
“If you don’t have someone living in the house while it’s being rehabbed or without a renter, you will lose your furnace, water heater, lead glass windows and copper if you have any. Needless to say, I have some scruples and told the couple to just let these two houses go, as the rehab alone would be way over what the home will be worth in 10 years.”

It’s back to what I said at the end of last year (and the end of the year before). Hang up that notice: Gone Fishing, or go to Brazil.

Lunch in the Pas de Calais

I had business to transact in France the other day. The channel tunnel service was up the spout, with a train every 90 minutes, so that option was simply not available, so it meant clambering on the good old car ferry.

At six in the morning everywhere is pitch dark, and altho it tried to get light the fog kept coming down, and then the clouds did their bit, and what with one thing and another it was still dark at seven o’clock.

As we pulled out of Dover the sun made a brave effort, and we looked set for a fine day. But that was the only performance we got. The clouds got darker, and by evening it was raining.

Never mind. I did my business in a warehouse in a small industrial estate just south of Calais, and then went to look for a nice restaurant.

One of the pleasures of going to France is browsing around the shops for some interesting things to eat, and checking out the wine shelves; and then finding somewhere with a good menu.

I was recommended a ferme auberge on the outskirts of Guines. It was a lovely place, just off the Rue de Verdun. You turn down a private tree-lined drive and come upon an old-fashioned farm complex.

Many French farms are built in the old style, with the farmhouse being one side of a courtyard. An arch leads you into a square surrounded by barns. The house faces you.

This particular farm had a double courtyard. The first is surrounded by barns which had been transformed into a hotel, and through an arch you could drive into the second courtyard, which sported the farmhouse. The only snag was that the restaurant was undergoing renovations.

Okay, so what was second on my list?

Next stop Ardres. This is a fascinating little town. There is a charming central area with a large common surrounded by trees. A couple of summers ago we watched a horse show there, which was only interesting because some wretched child fell off her pony every time she went round a particular corner.

On the way in from Guines is a Logis de France on the left. It had an interesting menu, including the usual speciality of the Pas de Calais region, coquilles st jaques. There was also a lot of salmon on the list, including a duo of soused salmon, and smoked salmon.

Further down the road was another restaurant that had been recommended, and they had several menus, from €9.50, €16, €25 and €49, all with wine included.

Choosing where to eat is a serious matter, so I decided to check out one more spot before making my decision. Back into the town, turn right and along the side of the central common to the Francois Premier. Somehow that didn’t hit the spot. Julie suggested one that we’d just passed, La Griotte.

The name rather put me off. It sounded too close to the word grotty. But apparently it is the French word for morello cherry. There was me thinking that the French for cherry was cerise.

For those collectors of pointless information, I looked up Griotte in Google and found a website called Intrigued, I had a look. It said:

“This research effort investigates the application of a multiphase project management approach to oral history projects. The identified phases include research, interviewing, transcribing, editing, as well as analysis — steps currently practiced by oral historians. The discrete nature of these steps, introduces the possibility of devising computerized or digital solutions to produce high quality source materials that may be utilized by historical researchers and scholars for presentation and interpretation.”

Streuth!! Give me a morello cherry any day.

Actually I initially misspelt the word and ended up looking at something quite different:

“Garot or galjungi is a variety of hanbok, Korean traditional clothing, which has been worn by locals of Jeju Island in Korea as working clothes.”

But I digress.

Luckily none of the above rubbish was available at the time and we walked in to have a rather fine lunch.

My €25 menu provided me with a rather nice paté de fois gras which was accompanied by a glass of wine that was new to me: Coteaux du Layon. (Excuse me a moment while I get a bottle out of the fridge and have a quick slurp. Obviously after lunch I went straight down to the supermarket in St Omer and stocked up.)

The wine had a musty tang to it and I assumed it was some kind of sauvignon. But the nose hinted of a much deeper taste and it went extremely well with the paté.

According to the blurb on the label there is a river by the name of Layon, and the vineyards border this. The grape is the chenin, and it is left on the vines to develop the noble rot, and picked late. Drink it fresh, to accompany paté or blue cheeses, says the label. Actually it tastes quite nice on its own for elevenses. (Sorry, I had to have another slurp to check I’d got the description right.)

The area where the grapes grow is south of Angers and West of Saumur, along the Layon river. Apparently the wine will last for ten to twenty years, altho that is a bit optimistic. I find good quality wine has a disastrous habit of not lasting very long at all. The aromas are of honey, fig and acacia, it says here.

Back to the lunch. Julie had a bright yellow soup that was advertised as soup of the day (legumes). What else do they put in these soups to give them that extra something?

For main course I had that well travelled bird, turkey. What is it about turkeys? No-one seems to be able to make up their mind where they come from. I am told they come from south America. That would account for the Portuguese name for the bird: peru. The English name is supposed to derive from the name of the boat upon which they first arrived in the UK, hence Turkey. The French seem to think they come from India (d’inde).

My turkey was covered in a delicious sauce, and served with rosti potatoes and well cooked chicory. The second wine wasn’t so stunning as the layon, but was still good.

For pudding I had an apple crepe with a flambéed sauce.

What a splendid way to spend lunch time. A perfect meal, not too filling, and beautifully crafted. I recommend that you stop for lunch on your way south next time you roll off the ferry.


BMV: Below Market Value

I write notes on the various property bulletin boards. One guy asked for some advice about going into Buy to Let now to provide an income for his old age. He brought up the old chestnut about buying below market value BMV, and I pointed out that his biggest worry should be if interest rates rise, as a 2% rise in interest rates equals a 30% rise in mortgage repayments.

Anyway, I thought you might like to read my reply.

I dont know who invents these silly terms, but perhaps you could tell me what “below market value” means. And why do you think house prices will go up if interest rates go up? Traditionally, when rates go up house prices come down. Think about it for a minute. If rates go up you get less bang for your buck, so why would prices rise?

Interest rates are as low as they can go. They can only go up. When they do, house prices will stall or fall.

I am old fashioned. I believe in simple obvious things. The price at which something sells is its market value. Below market value is a price below what it actually sells for. That means you cant buy below market value. If something sells for a price, that’s what it’s worth on the day. Maybe some days later it would be worth more, maybe less. So?

You need to understand some basics. First you need to be able to value a house. Can you? One can value a business. It is done on a daily basis for public companies on the stock exchange. I recently bought a Japanese company. It was trading at a tenth of its book value, but I bought it at its market value, i.e., what is was selling for on the day. A year later its price is half what I bought it for. That makes no sense, but I have still lost money. What it’s value ought to be is one thing, but what it sells for is what actually leaves, and then returns to my wallet.

There is a book value, and a value in the market place. There is also a timeline. Put all those together and you get a trading situation. You buy low, sell high. You can only do this if two things come together at the appropriate times. You need to be able to compute the intrinsic value of what you hope to buy, and find that value is above the market price or what I call sentiment value. In short, you seek to do the opposite of what the idiots do. You do not buy below market value, you buy at market value when it is below intrinsic value. There is a world of difference.

To be successful you therefore need to be able to work out intrinsic value. I tell you how to do that in my books, no-one else to my knowledge does that. The clue is above. How do you value a business? A buy-to-let is a business. Which is why I always say if you cant do maths keep clear of the property business.

So, what you are seeking is to find houses or flats that are selling for less than their intrinsic value. If you are one of those folks who thinks estate agents and banks can value houses, then please tell me why they all got it so wrong by over-valuing them in 1998, and again by undervaluing them in 1992? I sold in 1988, and I bought in 1992 because I know how to value a house. The idiots didn’t. I make money out of idiots, it has always been the best way.

In one of my books I give the example of a flat I am currently selling. In 1987 an idiot bought it for £47,000. In 1993 I bought it, fully furnished, for £20,000. Someone valued it in 1987. Someone valued it in 1993. Did the intrinsic value of that flat vary by such a vast amount over the course of six years? Or was it the case that the market value bore no relationship to the intrinsic value of the flat?

The smart guy buys not below market value, but when the sentiment value (the price in the estate agent’s window) is below intrinsic value. If you dont know the difference, and how to work out intrinsic value then you have a problem, and you’ll get screwed.

You also need the timeline. The timeline is important because it carries information on two very important issues. The first is the interest rate. That is important because when the rate is low you can effectively buy more bang for your buck. But the corollary of that is that when the rate rises, your commitment rises too, and there is bugger all you can do about it. External factors are changing the terms of your contract with the mortgage company to your detriment.

The way round this is to buy when interest rates are falling. You cant do that when rates are already on the floor. The problem at the moment is to know whether rates are likely to remain on the floor for several years or not. The Japan situation indicates they may well do so. The sovereign debt problems would indicate otherwise. Dont ask me which way the wind will blow in this instance; I dont know.

The second issue with the timeline is the movement of house prices, the ebb and flow of what I call sentiment value. It goes up and down with fashion, and the availability of money and credit. Nothing else affects it, despite what the “experts” say.

Look at the economic situation. When it is bad house prices fall. They rise after the economy improves, not before, hence any rise now is a false dawn. The affordability index for various parts of the UK ranges from 7 in Bournemouth to 5 roughly everywhere else. The comfortable level is 3. In a recession/depression I would expect the actual figures to be low not high. So I have to ask myself why they are still high? And when they are likely to fall.

Look at the charts back in 1929-35. The real crash came late, and it crept along at a painfully destroying pace. Are we in for a re-run? I dont have a crystal ball. But these are the real issues you need to address.

The bottom line is:
1    Learn how to value houses. Learn their intrinsic value.
2    Suss out the cost now, and the cost when rates rise, and plot that against the rental return.

That means you need to take a view on the economic trajectory. Look at Japan over the last 20 years. Look at the sovereign debt problems in the world, and ask yourself if all is well. Then ask yourself where you will feel comfortable. With regard to btl do remember that if the income model works, who cares what the sentiment value of the house is? You are in it for the income not the capital gain.

My personal view is that it is a funny time to go into this business. I am recommending my kids stay on the sidelines. I may, of course, be wrong. I prefer to go into a business that is screaming success at you, not one that looks a bit iffy. But we all have different comfort zones.

My book does tell you how to value a house, and all the other info you need to be a property expert. I’ll alert you when it’s available. I have to do a trailer for it first, which may take me a week. If you are interested in taking a peak at it before buying let me know, and I’ll give you the url as soon as I upload it


The Spanish Property Market

This is what I put in my property newsletter for the summer of 2007. I am gradually transferring some of that material into this blog.

You can check out the newsletters by going to:

I’m also transferring some to show that I can tell you what the market is doing, and what it is going to do. I’ve been doing this for years. I’m good at it. You could be too if you read my new book on the subject, which I finished this morning. I’ll post a link to it sometime later this week if all goes well.

So what did I say three years ago about the Spanish property market? Here it is:

Are you about to buy property in Spain? If so, then dont.

Have you bought property in Spain any time during the last three years? If so, prepare for a shock. You could be sitting on considerable negative equity in a year’s time.

Have you bought into any Spanish off plan deals since 2003? If so you are undoubtedly sitting on negative equity as most off plan deals are selling at roughly twice the resale price of similar property.

When doing my research for my book The Little Off-Plan Book I checked out the prices of off plan deals in parts of the Costa del Sol, and compared them with resale prices as advertised in the local papers. The off plan deals were running at approximately twice the price of the resale properties. Anyone buying into these deals is buying negative equity.

But what about the bank valuations you might ask? Yes, what about them? As I say in my other property book, After the Property Boom I’ve sat in on meetings at the bank with developers who want to finance their next deal. They need the bank’s money, and of course the bank needs to lend money to stay in business. So they connive at selling off all the unsold properties so the lending is split among lots of individuals, which makes the lending safer for the bank, rather than being tied to one borrower, the developer, who will go bust if the properties aren’t sold. It also means that with the properties sold, they can now lend to the developer on the next deal. It’s a great way for the banks to operate, and grow their business.

When you see the term “bank valuation” you should translate that as “phoney valuation”. The only true valuation of a property is what it will fetch on the open market, not what some guy from the bank says it’s worth. You can find a better valuation by looking in the paper at the property ads for similar products.

But what about all that instant equity you might ask? Okay, fine. What can you do with it? Can you take instant equity and go and buy yourself a nice meal? A bigger car? A yacht? All you can do with instant equity is get yourself more debt. If your debt is secured on negative equity you have just dug yourself a whopping great hole. In short, every time you try to pay off your big mortgage you are throwing money down a hole. You are paying off something which doesn’t exist: that high valuation. You would be better off taking the keys back to the bank and saying Goodbye.

Let’s have a closer look at Spain, its building industry and the general economy. And let’s compare it with America where there is a real estate melt-down.

Since 2000, Spanish house prices have doubled. That’s more than any other country in the western hemisphere, even Ireland or the U.K.

Not only are prices extremely high, they’ve become totally unaffordable. The house price-to-income ratio is one measure of this. In Spain, the ratio is more than seven. In other words, on average, in Spain, people’s houses are priced at seven times their annual pre-tax income. Compare this to the U.S., where the ratio is 4.5. In other words Spain’s homes are almost twice as expensive as American homes. And the prices of American homes are crashing. What do you think will happen to Spanish prices? Do you seriously think they will go up?  Ha ha!

Last year, 800,000 houses were under construction in Spain, that’s more than in Italy, Germany, and France combined. Excuse me but doesn’t that sound like a spot of over-supply? What happens when supply balloons? Thats right, prices fall. And please note that this building glut is just less than half the houses under construction in the U.S., while the U.S. population is six times bigger than Spain’s.

In the good old days before the euro, the Spanish government could control this rampant over supply by raising interest rates. They used to be at 12%. That tended to keep things under control a little. Now interest rates have been around the 4% level for some time. They were 2% 18 months ago.

This sounds very similar to the American situation where interest rates were 1% a few years ago, but are now sitting at 6%. This is bad news for those on adjustable rates. Hold on: in the U.S., only 50% of mortgages come with adjustable rates. In Spain, 90% of mortgages are issued with adjustable rates. So the Spanish consumer is much more sensitive to rate hikes than the American consumer.

In the U.S., the construction industry makes up 8% of the total labor force. In Spain, 13% of the labor force works in construction, and construction investment measures 18% of Spanish GDP, up from 11% in 1998. This means that the Spanish economy is much more dependent on the sale of house to gullible foreigners than is the US. With falling prices in Spain construction companies are in trouble, and bank lending is being severely restricted. This will impact on the labour force, which is going to get cut in half. That means another 6% of the population out of work. Yikes! 6%!! What is that going to do to the Spanish economy in general? And what is it going to do to house prices?

Spain can do nothing about interest rates. They are set in Germany where the housing market has been slow for years, and is only now starting to move upwards. This is exactly the opposite scenario to Spain. This means Spain is in big trouble. The Bolsa (Spanish stock market) has already seen big falls in construction company stock valuations. The general market has dropped by 10% in the last year alone. There is more to come as this situation is only just beginning to unwind.

All this is before the foreign investors begin to feel the pinch and start to panic about their negative equity. When that hits them in the face how many are going to be panic selling, driving the market down even further?

All I can say is, if you want to buy in Spain, wait until this mess unwinds, and the market crashes. Then you will be able to buy some quite amazing deals, perhaps for a third of the price you would be asked today. Whatever you do do not buy at these prices just before everything is about to fall off a cliff.

If you have bought into an off plan deal sometime during the last three years I cant advise you. You made a damn silly decision in the first place and I guess you’re stuck with it. The real problem with this scenario is that you have already lost money. Waiting for the market to catch up with you is going to take a very long time.

Moving to France

About a week ago I received the following email. I thought it might be useful to answer it in a mailout. The reply is likely to be rather long, but no apologies for that.

“My wife and I are moving to the Poitou Charentes region of mid western France in about two years time.  We are going to live there so the normal rules don’t apply as a home must always be treated differently to an investment.  Nevertheless, if it all goes wrong and we find we want to return to the UK (we are keeping our UK property to provide us with income so no fears about stepping off the UK ladder) I’d like to know that at least we bought a good French property that hopefully held or increased its value in these bizarre times.

So my question is, on the basis that it is to be a home, where would you put your money?  Are food prices set to continue skyrocketing?  Is farmland due to follow in price?  If so a smallholding with land would be a good bet.  Are traditional old French houses still going to be desirable or were these just drafty, cold and difficult to heat old wrecks a passing trend fuelled by A Year In Provence, if so a modern building should be our home?

I know I’m asking you to look into your crystal ball on this but you’ve steered us right in the past.

One last question – depending on what we decide to buy we may need a small mortgage.  With the euro set to be the world’s leading currency, would you borrow from a UK bank in sterling or a French bank in euros?”

As you can see, you guys dont mess about. That is quite some question, or series of questions. But here goes.

First, let’s break this down into a series of manageable questions.

1    a)    What’s going to happen to the French property market

b)    Is French agriculture, either on a commercial scale or a private scale going to be a good bet

c)    What sort of property should one buy in France if one wants to get a relatively easy re-sale

2    What’s going to happen to food prices, and what knock-on effect would this have on land values

3    An implied question is: should one keep a property in the UK in case of foreign melt-down in some form or other

4    Another implied question is: Is my crystal ball shiny or cloudy today

5    What currency should you be borrowing in these days

1a    I haven’t a clue what is going to happen to the French property market. In this respect my crystal ball is decidedly cloudy. But I can offer some pointers.

The French are a bit more conservative than the average British speculator. The French property market has moved up quite smartly over the past decade, but the rise in prices has not matched the giddy rise of the UK market, so it is not really over-priced. Having said that, I dont know where it’s going next, but I would be less worried about a serious correction than is possible in the UK.

The secret is to buy carefully. Dont bid up anything. Play hard to get. Take your time. By all means praise something you like, you are more likely to get a good deal from someone who thinks you really do appreciate what they are selling, but make sure you have practised shrugging your shoulders. “Yes, it’s a lovely place, just what we want, but” long continental shrug of shoulders “but everything is so difficult these days…..” Practise those long fading silences as well.

1b    Farmland in France is underpinned by so many subsidies that it would be difficult to go wrong. But what are we talking about here? Let us separate a couple of items on the agenda. There’s staying alive, and there’s growing the financial empire.

The staying alive bit is easy. Anyone with half an acre of ground can feed themselves very well. You can do it with less ground. All you need is keenness, good weather, and a couple of large freezers. Times are getting tough, and food is going to start costing a lot more. But we haven’t got to the stage where you are going to make a fortune selling your food to someone else. And the worse the situation gets, the more you have to guard against theft of your food. Let’s not go down that route. It is too frightening to contemplate and I dont think we have reached the disaster movie stage in our lives just yet.

I have a small farm in Portugal, and I simply cant make a living on it. I have forty orange trees. I cant sell oranges to anyone. I have a dozen peach trees. The peaches (I had some for breakfast) are enormous. I get a couple of euros a kilo for them. It’s hardly worth the bother of picking them. That may well change, but I dont see a business plan here.

If you want to make money out of land it has to be on a large scale. I did suggest a year ago that while residential property was falling in price across the US that it would be a good idea to buy agricultural land. You will note that in some places that land has gone up in value between 30% and 100% in just a year.

The latest moves in land are in South America. You will probably have noticed that in Argentina there has been a spot of bother with the farmers over a 49% tax on foodstuffs. This has led to mega run-ins, and a move to buy up land across the border in Paraguay.
If anyone wants to get into agriculture as a way of life and make money, then have a look at South America, especially Paraguay. Uruguay is also an interesting place. Land prices are still low, and they are rising. These countries are going to turn into the bread basket of the world.

Countries such as Brazil and Paraguay are also high on the list with regard to that other great commodity that is increasingly highly priced and in demand: energy. Brazil has masses of energy, including the largest new oil find on the planet. Paraguay is one of the few countries in the world to export energy. It exports 90% of the energy it produces; and all that energy is free and renewable.
So, if you want to get into agriculture buy land in the Americas. Your best bet is no doubt going to be in those Latin American countries listed above.

1c    I have noticed that unusual properties take longer to sell in bad markets. Dont go for something too odd. You need to be in a reasonably average area, but at the better end of that area. You should be within easy commuting distance of a town which has a wide range of job opportunities, and those opportunities should be such that someone getting an 80% mortgage on your house would be able to service that mortgage from the weekly take-home pay. This means avoiding tourist areas like the plague.

Remember that the French are, generally speaking, urban folk, so dont stray too far from the main metropolis. You should be able to commute within fifteen minutes.

This area of France (Poitou-Charente) is a splendid place to choose. It is reportedly one of the sunnier parts of France, and I am heavily biased towards the place for several reasons, and anyone moving there is encouraged to invite me to stay for a day or two.

I remember once driving down thru France and the weather was foul until we reached Angouleme. I have pleasant memories of hitch-hiking thru the area with Annabel, my wife, and remember being ferried around in a small truck filled with sheep which looked the same from each end. And we slept in a berger’s hut just outside Saintes, and I remember the idyllic winter’s morning as we set off towards Bordeaux.

It is the home of cognac. It is within striking distance of Perigueux, and all that wonderful rich cooking from that area. Oh dear, dont start me off on all of this.

Okay, onto point 2 in a later post