You will note that one reader has asked a very simple question. Bearing in mind my rather drastic remarks about property values he quite rightly wonders whether spending half a million on a dream home in Spain is a wise decision. Are repossessions the answer?
Various points are made as part of the question. He wants to own his own home. He wants to live there in a long and happy retirement. And why not? But the place costs half a million. Is it worth it?
The questions here dont really relate to whether one should rent or buy. Other questions, such as what happens if one’s partner gets ill, or dies, dont come into the discussion. These are private matters, and I trust the questioner has worked his way through them.
I cant write a book here about Spanish repossessions, so I have to skate over a lot of points, but my main point is a general one. It relates to values. It relates to the system governing house prices.
Let me show you something. My mother bought a detached three bedroomed house in 1949. She paid the vast sum of £750 for it. It was a cash purchase. It cost approximately the same money as a new car. Since then the value of money has plummeted. I reckon in terms of inflation, you would have to multiply that figure by about 50 to get a similar price today. In short it would cost about £37,500. Before the crash it would probably have sold for an extra nought, say, £375,000.
I can understand house values going up to counteract inflation, but why the extra nought? Where did that come from?
My mother had to pay cash. Any buyer in 2005 or thereabouts would have probably bought with a 95% mortgage. Having mortgage finance makes the process of house buying a totally different situation. You do not pay in one go, you now pay over a 25 year period. With interest rates on the floor the cost of the money is less than the march of inflation, which means you essentially get the loan for nothing. That makes it possible to pay a lot more for a house than before mortgages were widespread.
Now let’s see what happens when mortgages become difficult or even impossible to get. Have another read of my analysis of that friend’s flat near Albufeira in the Algarve. The actual cost of the flat with a mortgage allows a valuation of about €90,000. Without a mortgage the real cost of the money needed to buy gives a real value of about €35,000. The difference is vast. And this is not just an academic exercise. With a mortgage I could afford to pay the higher figure. Without it I would be hard pushed to pay even that lower price. That means the price at which the flat changes hands has to drop quite drastically to take into account the difficulty of obtaining useful mortgage facilities.
House prices rise with the advent of easy money. They fall when that easy money is removed.
House prices across Europe will continue to fall while the current monetary fiasco continues. And it is set to continue for the rest of this decade if the current political chicanery is anything to go by.
I am not telling people that they should not buy houses. I am not suggesting everyone moves into a hotel. I am merely pointing out the best use of money. If you want to spend ten million euros on a nice little Picasso, then spend it. If you want to make your money work for you to produce a good income, then do so. It’s your choice. All I’m doing is pointing out equivalences. And I am pointing out that the equations have changed due to the locked up banking system, and the demise of the easy money system we have been used to for the past fifty years.
Any house bought now will be worth less in a year’s time. It will probably be worth less in ten years’ time. If that does not concern you, then buy what you will. If you have adequate funds for a great lifestyle, then you have nothing to worry about. If, on the other hand, like most people, you need to watch the pennies, and need to make your pounds go as far as they can, then dont think real estate in Europe until easy money comes back into fashion.
I still say that the easiest way to value a house is to weigh up the difference between the cost of the money to buy, and the cost of the money to rent. Ideally there should be no difference. If the difference is more than 20% in either direction then one of the prices is way out of line.
I can get at least 10% return on capital. 10% return on half a million is about £1,000 a week. Would it really cost that much to rent that half a million pound house? How about offering to rent the house until the vendor considers a price reduction?
The way to find cheap Spanish repossessions is to avoid estate agents. Your first point of reference is the local newspaper. The second port of call would be the local bank. Ask them to put you in touch with their repossession centre. They will have thousands of properties they are desperate to get off their books at rock bottom prices. Let them know exactly what you want, and they will send you a list as long as the Nile. So long as you can cover the mortgage they will be happy. Cover 75% of the mortgage and they will probably still be happy.
As to the area, just outside Javea, I think it’s rather nice. I used to live there myself, and I was very happy there. If you do buy, invite me over for a couple of days, I can tell you some interesting stories. I will add a few Spanish repossessions in that area in the next members’ bulletin.