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.
john