Buying Advice

If you are considering buying real estate some time in the new year, what are the things you should be looking out for?

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 that 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.

Remember 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.

Wither Spain and Portugal?

Let us have a look at what is happening to real estate in Spain and the Algarve, and, armed with that knowledge, see what the year ahead has in store for us.

There are several factors that control what happens to the housing market. Let’s first list the factors that have little or no influence at all. Those who want to buy may be an important group, but more likely they are of no importance at all in the market. Why do I say that? Simple. I want to buy an aeroplane as I love flying. However, I wont be buying because I cant afford one. The same goes for that Ferrari I fancy.

How about those who do want to buy and have the equity but not the cash? The boomers are beginning to retire. There are a lot of them. They may well fancy retiring to the Algarve, but can they sell their home in Northern Europe?

We need to analyse these situations and see whether they are indeed favourable for the housing market in the south.

Secondly we need to look at the value of real estate south of the snow line. Are the prices realistic, or are they inflated?

Thirdly, we need to look at the current state of the market: how much real restate is empty and up for sale?

The retiree market is in trouble at the moment for the simple reason that people with homes in the UK, and especially in Ireland, are having serious trouble in selling. Unless they can sell for a suitable price they wont be buying here. There is also the problem set by the high value of the euro. When I first came to live here the exchange rate was about €1.55 to £1. Recently it has been trading around €1.20 to £1. That makes euro-priced houses much more expensive. The exchange rate alone has pushed up the price of a home to UK buyers by more than 20%. That’s some hike to cope with in a recession. As the English have traditionally been the biggest buyers that is a big dent in the market.

For the Irish there is the problem of house values back home. They have dropped by between 30% and 50% already. In some cases a similar drop is likely. They certainly wont be out in force as buyers any time soon. That is also another big dent in the market because two or three years ago the Irish were buying in droves.

Any buyers will have to be coming from countries like Norway, where economic conditions are still relatively rosy, or from countries where the number of existing emigrants has so far not been very high. All I can say here is that I hope they will be coming. We desperately need them.

With crashing economies in all directions the emphasis is now on value for money and downright cheapness. Is Spain or the Algarve cheap?
Let’s go back and do a simple bit of maths. There are two calculations you can do, but the most important is simply to work out what it would cost to rent, and then see how the price to buy stacks up against the rent. If it doesn’t stack up there is little incentive to buy when you can rent more cheaply, and if you want a change, you can just give in your notice and walk.

Alternatively you could look at your purchase as a business venture, and base the value on a simple rental return. Your ROI would then be the percentage return on the cost of the house or flat. If that return is less than about 7% (the usual market rate) it would be a lousy deal, and no businessman would entertain it. Conclusion: the purchase price would be too high.

You need to find out what your apartment/villa will realistically rent for. Let’s say you can get €100 a week for a small two bed apartment. If that €5,000 rental return equals a 7% ROI, then the purchase price would equal about €70,000.

The other way of calculating value is to see if the cost of the purchase is roughly the same as the cost of the money needed. If you rented that apartment the annual rent would cost you €5,200 a year. If you borrowed money to buy the property, would you be paying more than that or less? Money costs about 3.8% these days. What this means is that by this calculation your flat is not really worth more than €125,000.

So there you have it. If you can get €100 a week for your nice apartment it is in real terms worth somewhere between €70,000 and €125,000.
If you want to know where you stand on the value scale you first have to find out what you could realistically get from renting (always assuming the customers are there in the first place), and then ask yourself why any sensible person would pay more to buy than they would to rent.

Remember I am trying to compare like with like. I am comparing the cost of the rent with the cost of the money. And dont tell me you already have the money so it doesn’t cost anything. That ignores the opportunity cost. If you spend the money on a flat you dont have it available for any alternative investment, and in these hard times cash is king. You can get serious returns on money these days. If you are getting less than 10% you are simply not looking in the right places. 10% of €70,000 is of course €7,000. The rent is nowhere near that, which makes that alternative valuation of €125,000 look a bit high. Why would any sensible person give up an investment bringing in €7,000 to buy something you could rent for €5,000?

Capital gain perhaps? Ha ha. There wont be a capital gain on something that is too expensive in the first place. To get your capital gain you have to buy cheap, and in hard times, super cheap.

Finally, let’s have a look at the state of the market. By this I mean the number of properties for sale and the number of buyers out there.
Take a walk round Lagos. There are empty apartments as far as the eye can see. Try Portimao; the same problem. Behind me is a whole estate that has been built for two years. There are fifty or sixty apartments. About six are inhabited. Wherever you look are empty buildings. There are probably 50,000 apartments for sale, and half as many again would be for sale if there was any market for them.

Go across the border into Spain. There is a totally empty estate built where Ayamonte faces the Guadiana. The Esuri estate the other side of the motorway has about 12 residents. It’s about the size of Welwyn Garden City. Drive along the coast to Huelva. There are miles of the darn things. Keep going right round to Barcelona. It is going to take more than a decade to shift this lot. Prices of apartments should be on the floor. They will be for years.

I’m sorry to say the news is not good for tourist-land. Prices have gotten way over where they should be, and, sad to say, what goes up, usually has to come down. What a bummer!

Okay, that’s for tourist apartments, but what about villas perhaps in inland towns and villages?

Here things are slightly different. If you are out of a tourist trap you can at least sell to locals instead of relying solely on expats and tourists. That means you have a much better chance of actually getting a sale in the first place. That is a major advantage.

Secondly, there are far fewer units for sale. You dont have that massive overhang in the market that will keep seaside tourist spots in the doldrums for years. Inland you are far more likely to find that prices stabilise sometime over the next year or so. Not only that, you will find that by buying outside the tourist traps you will be buying into a far less risky market. I think tourist properties will continue to decline in value whereas those in proper independent towns will hold their value.

You will note that on the Unique Property site we dont sell apartments. We sell properties that already have an individual value. The individualness will in all probability mean that prices will be largely maintained, and any losses will be minimised.

What I cant predict is what will happen if the euro starts to fall apart. But if it does, prices across all of Europe will be affected, and I haven’t a clue how the chips will fall.

Real estate in 2011

This is the time of year when all the world’s so-called experts line up and tell us how things are going to pan out over the next twelve months. The fact that the vast majority of them get it wrong every year doesn’t seem to perturb anybody. I guess it’s rather like looking up your stars and having a laugh.

I dont have to do this, but I do run the UK’s third busiest property website, ( and I do run a series of newsletters ( which try to make sense of what is going on, so let me try to work out what we need to know to get safely through the next year.

First some basics.

The real estate business has various periods of development. You get the period when land is the basis of wealth. That period corresponds to pre-industrial societies. Then you get the period when business and production is where the money is. Real estate suffers during those times as money is channelled into other more productive enterprises. Then you get the democratisation of land, when that ubiquitous beast, the average man, wants a bit of the action, wants his own home, wants security, then, everyone beware, he wants to invest in his future.

In the UK those periods roughly correspond to the period up to about 1800, then from 1800 up to about 1956, and then from 1956 to the present day. In many other countries those time-scales have occurred much later. In Italy the second stage didn’t really kick in till after 1945, and the third stage was complicated by tourist buying which started in earnest in the 1980s.

All of Western Europe has reached the last stage. What happens then is, that prices are henceforth completely dependent upon the availability of finance. Nothing else counts. First, we get rising wages and disposable income (something that did not exist before the first world war for the masses). Then we get mortgages, and ever more sophisticated investment deals, all of which increase the availability of finance, till you reach a stage where no-one needs capital any more, just an income to service loans.

From now on house prices are dependent upon two things: the availability of finance in the first place; and the ability to support those loans, i.e., income.

When bank lending locks up, the first essential ingredient is shut off. When unemployment grows, a country goes into recession or depression, and people become generally poorer, so the second ingredient is severely compromised. Result, house prices stall, or fall.

Will they go up in the coming year? The answer is simple. If the recession continues, which it will, and the banks continue to be in a mess, which they will, then both ingredients for house price rises will be negative, so there will be no rises.

Another factor comes into play when there has been a house price bubble; the relationship between renting and buying. Most people simply dont have capital enough to buy a house outright, and if they did, they would still need to look at the simple economics of buying a house.

If you can rent a three bed villa for €1,000 a month, then the cost to live in that house will be €12,000 a year. If you bought that house for €300,000 on a 100% mortgage at current rates, the cost of the money would be about 3.8%, or a total of €11,400. Buying would appear to be a good deal. Ideally the cost of the money and the cost of the rent should be about the same. Once that ratio gets more than 20% out of kilter there is a tendency for equilibrium to reassert itself. If it’s cheaper to rent, people will rent, and prices will come down. If it’s cheaper to buy, people will buy, and push up prices. If prices exceed that 20% difference then you have a bubble. The subsequent ride can be nerve wracking or exciting depending on your character.

Earlier this year a friend of mine rented a house in Ireland at the going rate of €700 a month. He noted the place was up for sale at €400,000. By my calculation that house is only worth just over half that money. Conclusion: Irish house prices have some way still to fall. They were in one heck of an overblown bubble. Anyone pushing their luck in a bubble is setting themselves up for a painful fall.

The maths of the above situation is as follows: Annual cost of rent = €8,400. Annual cost of money = €15,200. From where I’m sitting it is a no-brainer. Prices have to come down substantially.

Next week I’ll have a look at what is going on in the Algarve and Southern Spain, see you then.