The Housing Market is Changing

The Housing Market is Changing

Things are changing in the housing market.

Those who regularly read my blog may well have been surprised at my latest articles about buying in holiday resorts. I have made it clear that I think buying a holiday home is a dreadful waste of money. It appears that the larger property companies are having the same thoughts about property in general.

We are going to see a shift in the way things function. I said back in the nineties that owning property was going to become more difficult in the not too distant future. Governments will increasingly interfere in the housing markets as houses are visible and cant be moved. They will attract more taxation, and a lot of that taxation will be masked in the form of regulation. As with virtually all my predictions I was right, and that is how things are now playing out.

Not only that, but it seems that the latest fad is Build-to-Rent. Large rental organisations are thinking of building properties specifically to rent out rather than to sell. I have increasingly thought this is the way of the future for the housing market.

Build to rent’ schemes would almost certainly be aimed at younger professionals and possibly retirees stepping away from home ownership, and incorporate social and sporting facilities such as pools and gyms.” This quote from the latest survey.

Five years ago I started buying into hotel schemes specifically to give myself somewhere free to live for a month every year, and have an income from the shared rental. It seemed the way forward. For the past two years I have been suggesting that rather than buy you should keep your head down and probably rent until things improve. And since the beginning of this year I have been showing you how you can manage property much better by renting while investing your funds in something more lucrative.

Meanwhile we have the latest bank mortgage lending figures. The publicised figures show a healthy amount of lending, but they are adjusted figures, or, as I prefer to say, fiddled. The real figure is almost half the publicised one: 23,329 loans in January. That’s over 50% down on normal market levels pre-crash. The figures also show that 25% plus deposits are generally needed, ruling out the one class of buyer that drives the housing market, the first-timers.

“When you consider that two of the biggest high street lenders, Lloyds and RBS, are currently taxpayer-owned and in theory have almost infinite reserves to lend from, this is a damning indictment on banker activity to support the economy.

“Lending to small businesses is also shrinking as the same group of bankers fail to support this crucial part of the economy as well.”

You can take it there has been a big shift in the housing market. Things are not functioning the way they used to. The old metric is no longer any use. With bank lending in the background the whole financial spreadsheet has changed.

If you did not read my previous blog showing how mortgage lending changes house values, then do so. It’s crucial reading:


Houses Without Mortgages

Houses Without Mortgages

Would you like to know what happens when banks stop lending on real estate? I think you ought to know. Houses without mortgages are sad houses.

I was called to a friend’s apartment the other day. She wanted to sell. She told me she wanted €60,000 for the property. It was less than she paid for it, but she would be content to sell at a knock-down price. So what would be a reasonable house price in these days of limited finance?

I asked her what the rent would be on such a flat. I already had priced that at €75 a week. She said “€300 a month”. Well, that is marginally less than €75 a week. It works out at €3,600 a year. By the time taxes, maintenance and services have been paid for that means a net figure of about €3,000 a year.

Normal business deals are valued at about ten times earnings. That flat is worth about €35,000. That’s a valuation based upon a cash deal.

There’s a two bed flat fifty yards down the road that’s up for €200,000. It will be for sale for the rest of the decade at that price. It’s worth about €75,000 in a cash economy. Anyone paying more is, quite simply, mathematically challenged.

“Ah, but the estate agent says it’s a steal at that price.” But, to quote Oscar Wilde, they “know the price of everything but the value of nothing”.

The intrinsic value of a house is not what you can get for it. It is what its equivalence is in the world. In a cash society if you can rent for €5,000 a year, which is about the going rate for a two bed apartment here in the Algarve, why pay €200,000 to buy the bloody thing? It’s real equivalent value is €50,000. Heck, you could invest that in a mouldy bank account and get more than €5,000 a year on that kind of money. And you dont have to pay for repairs and taxes. You’d have to be completely off your trolley to pay €200,000 for a flat when you can rent something similar for €100 a week.

Pretty well any safe investment will pay you 10%. If you had €200,000 a more sensible thing to do would be to invest it, collect the €20,000 a year, pay a quarter of that on renting a similar flat, and have a good time with the rest.

But what about life in the never-never zone? Things would be different if you had no money but could go to the bank for a loan. Then the equivalence would be of a totally different order. You go to the bank, they offer you a loan at 4% (the rate is about 3.8% here at the moment, but let’s stick to round figures). If you were going to buy rather than rent you wouldn’t want the cost of your money to be more than the cost of the rent, (remember we are not factoring in the repayment of the loan, just its cost) so you would probably be content to pay €3,600 a year to buy the first flat on a 100% interest only mortgage.

That means you’d be prepared to buy the place for €90,000. Doesn’t that just show you the difference mortgages make to the cost of buying a house? Doesn’t it also prove to you that house prices are not dependant on scarcity, or indeed anything else, other than the availability of cheap finance? It’s not the price of a house that counts, it’s what it costs.

If the banks aren’t lending then the value of money goes up quite simply because it’s scarce. That’s why so many companies are doing the job the banks aren’t doing. That’s why you can get a good return on your money these days. That’s why selling houses these days is an uphill task. Those who have the cash can do better things with that cash. Those that dont have cash are starved out.

With banks lending, that flat would be worth €90,000. With no mortgage finance available it is worth €35,000. What a bummer.

When banks dont lend, the equivalent cost of a house has to come down. When interest rates go up, the cost of a house goes up accordingly, roughly 30% for every 2% rise in interest rates on an interest only mortgage, so house prices have to come down to match the increased cost of borrowing.

Now you know how you ought to be valuing that house you want to buy. And now you know why house prices never never never always go up. They go up and down with the tightness and cost of borrowed money.

With banks not lending, you are stuffed until times change. That idiot down the road with the two bed flat for €200,000 needs to wake up to the new reality. Maybe he’ll sell, but only to a fool. However, there are plenty of those about, but at least they aren’t readers of the John Clare blogs.


Best Places to Buy Property

Best Places to Buy Property

The folks at A Place in the Sun are still making guesses about the future. They are, of course, never right, but their predictions are at least entertaining.

Let’s have a look at their list of the best places to buy property:

1 Spain; 2 France; 3 Portugal; 4 Italy; 5 USA; 6 Turkey; 7 Greece; 8 Cyprus; 9 Caribbean; 10 Malta.

What a weird list. Spain, France, Portugal, Italy, USA property markets all have some way still to fall. Greece and Cyprus probably have a considerable way to fall. The Caribbean is already highly priced, and although there are pockets of interesting places to buy, there is the problem that one is buying into a mature market, and taking on a dollar risk. I know nothing about Malta, so no comment. Turkey is currently doing well, but long term readers of my writings will know I am frightened of the Middle East, and so would still not recommend that area.

Of course, it really does need for someone to decide what the word ‘best’ means.

Are we talking about ease of access? Health care? Weather? Value for Money? Cost of Living? Easy to start a business? For most people ease of access to the UK is important, probably the weather is next, and then one would look for an ambient way of life that was relatively cheap.

For weather I’d put the Caribbean high, the Canary Islands, followed by Malta, followed by Spain and Portugal, but then I’d top them all with any country in Central America, South-East Asia, and Ecuador.

For ease of access pretty well anywhere in Europe for Europeans, but then the whole world is easily available these days.

Health care would put France at the top of the original list, but then several Central American countries would come a close second, or even top France.

For cost of living not a single one of the original list is worth giving a second glance. That also goes for value for money.

For cheapness and an ambient way of life one could choose pretty well anywhere in Central America, and perhaps Ecuador as well. And what about all those expats who have relocated to Thailand. On the other hand, southern Italy is not bad, and certainly ranks way above France and Spain.

As for good value property deals, where is Brazil on the list? Beach plots for £20,000? Come on, you cant get that anywhere in Europe. Try that in France which is second on the list.

Oh well, it was good for a laugh, and brightened an otherwise boring day.

Invest in Wine

Invest in Wine

A short continuation of my alternative investment list for those who are interested in such things. Investing in wine is a lone way from real estate, but if you sell up that holiday home and move into a hotel you will be able to afford the better things in life.

I have in my mailbag a reminder that investing in fine wines is very lucrative. It’s something I invest in myself, and have done for decades. I invested heavily in the 1981 clarets, and then added the 1982s and 1983s. They soared in value. As I like fine wine I have been investing ever since, and it is nice drinking a class wine knowing that if you could buy it in the shops, which usually you cant, a bottle would cost anything from £60 to £300 whereas I bought it for £6.

In fact I was invited out to sunday lunch last week and I took a top of the range 1999 burgundy and a 2000 claret. They were gorgeous. If you’d invested in those wines when they were en primeur you would have bought them at a serious discount to today’s prices. I checked up on some of them over christmas when I was drinking an absolutely superb 1999 Beaune. I cant remember what I paid for the bottle eleven years ago, but it was around £16-18. It’s over £300 now.

Fine burgundies

I buy to drink later, but you can buy the good vintages and never take delivery. The wine is professionally stored, and sold at auction when ready to drink, usually 10-12 years after purchase. The returns can, as you can see from my examples, be pretty good. The investment leaflet I am looking at projects increases of 30% p.a. Sounds about right to me.

As usual I dont actually endorse these investments I’m just letting you know they exist, but I have to say I do like this one, but then I am rather biased. Let me know if you want me to send you contact details, but do check the small print.