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.