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.