Property Price Woes

[shanagarry]

Just as I was beginning to pluck up the courage to start looking again - this appears in my inbox

The local newspaper tells us the Portuguese property market has reached bottom, and the green shoots of revival are at last showing. I've asked them where they buy their happy pills because the rest of us would like to take some and get high as well.

In fact, how often do we hear these reports that now is the time to buy? We heard it back in 2006 when Spain's property prices has supposedly bottomed out. Then again in 2008 just before the big crash. We heard it again two years later, and now the idiocy is upon us again. By all means buy. You will later regret it. We aren't out of the woods yet, not by a long way.

There is no recovery in property prices. There will be no recovery within the foreseeable future. I have said that before. I will keep on saying it. Here are four fundamental reasons why house prices are not about to rise.

1 . The inventory of empty homes is so large it will take a decade to shift. Until it is shifted there will be no recovery.

2 . Prices have to come down to realistic levels. Average wages in the Algarve are below €1000 a month. That means average house prices cant be higher than what people can afford. At 4 times income (the maximum you can borrow) a mortgage of 80% on a property cant be higher than €48,000. That means any average property priced higher than €60,000 is too high. I am talking about an average two bed apartment. If you want to pay tourist prices that's your problem. Obviously an average apartment is not a luxury apartment in a fancy development, or something that is front line. For them, a 50% uplift is reasonable unless there is something spectacular about the place, in which case the sky's the limit.

3 . Prices have to be comparable. If you can rent a place for €400 a month (I'm currently paying that, which includes all services, and I'm a fussy so-and-so which means my place is very nice), then the cost of owning a place shouldn't be significantly more than that. If it was then people would't buy, unless they are fools, and we know about fools and their money.

Let's do the maths. If you spend €60,000 on an apartment you no longer have that money so there is an opportunity cost. That should be set at 10% because anyone can get 10% return on their cash safely in today's environment. Just a quick look at dividends on ultra-safe stocks gives me 9.7% on one, 11.2% on another, and so it goes. In any case, you would value a business (renting out a flat) at ten times earnings. Take my flat. Ten times €400 a month equals €48,000. That's what my flat is worth.

The opportunity cost of €60,000 is €6,000 a year (what you dont get if you sell those dividend producing shares). That's €500 a month. The sane person invests the money, gets the dividend, pays the rent from the dividend and spends that extra €100 a month. The owner of a flat doesn't have the cash, and still has to spend money on IMI tax, repairs, renewals, insurance, and everything else.

In short, house prices are still way too high. They are not going higher any time soon, they are going lower. When the average apartment sells for around €60,000 the market will have reached parity. It will probably undershoot that figure.

I have been predicting this reversal for the past five years. I monitor figures in three locations. I am now finding that the prices are hovering around €70,000 across the border in Spain (down from €135,000 five years ago), and they are still falling. Prices in the Algarve have always been more inflated than in Spain, so they are lagging, and so have further still to fall.

4 For house prices to rise incomes have to rise also. They are falling. Not only that, but the government plans more taxes to hit property owners. You will in the future have to pay tax on the rent you aren't paying for living in your home. Nice isn't it? You tell me what the tax will be on €400 euros a month that you aren't getting. Now tell me how retirees are going to pay it out of their pension. Now look me in the face and seriously tell me house prices are going to rise.

It's simple maths really, but then most people aren't very good at maths.

[EMM]

Who is the scource where is the supporting data and confirmation of taxes etc etc.
The Sunday Times reports a 9% increase in enquiries for Portufguese properties from British buyers,
What is one man half empty glass is another half full.

[shanagarry]

Under 'House Prices in The Algarve'

http://algarvedailynews.com/

The guy's logic is sound enough and I would not be reading anything into the numbers of enquiries - it would be a lot more meaningful if that was translated into completions. There's another article in that piece that refers to rental market woes.

I'm not looking for bad news - quite the contrary.

[HampshireRich]

Who is the scource where is the supporting data and confirmation of taxes etc etc.
The Sunday Times reports a 9% increase in enquiries for Portufguese properties from British buyers,
What is one man half empty glass is another half full.

9% increase in enquiries means nothing. The sales/enquiries have reach such a low state that that figure of 9% is meaningless. I recall I once saw a banner from a protester who was striking for more wages for hospital porters and cleaners in the NHS. It said, and I quote - "3% of nothing is nothing, we want 10%" - says it all about statistics.

[RichardHenshall]

... That should be set at 10% because anyone can get 10% return on their cash safely in today's environment. Just a quick look at dividends on ultra-safe stocks gives me 9.7% on one, 11.2% on another, and so it goes. ...

Where?

[EMM]

I clicked on the link on the Algarve Daily News article and it took me to a property sales site that I had never heard of.
There is certainly no official link to that relating to tax changes on properties in Portugal.
This is being suggested in Spain however.

As for activity, our aquaintances in the property market are certainly busier this year and have had more sales albeit at the lower priced end of the market.

[laserblazer]

ultra-safe stocks

Isn't that an oxymoron? I suspect that nothing is going to get anywhere near 10% without a degree of risk.

[RichardHenshall]

ultra-safe stocks

Isn't that an oxymoron? I suspect that nothing is going to get anywhere near 10% without a degree of risk.

After posting I followed the links which ultimately lead to a site selling a subscription to a newsletter that will explain all! I've lost interest.

[laserblazer]

I've lost interest.

All 10% of it?

[R.Wethereyet]

The enquiry boom in real estate agents always picks up from May, and continues through to October. Ironically this also coincides with the build up to the main tourism months, with thousands of holidaymakers wandering around the towns of the Algarve, and dreaming of their own place in the sun.
Many enquire 'Just out of interest', in estate agents, to see whether they could afford such a place. Most can't.

It happens every year, but the sale to enquiry conversion ratio is probably less than 1%, but the agents when asked about how things are moving, always put on a positive spin, in the hope that this will encourage investors to flock to their doors because 'What if all these new enquirers actually buy' they will have very little to sell. Eventually they actually start to believe their own spin.

The market here is on it's R's, and in the area I live on the west side of town, their are more vende se signs going up by the month, and none of the ones that were there already aren't selling either. In fact, there have been several villas that have been for sale for over 3 years and nobody is selling.

The idea that the rich Russians and Chinese were going to be buying up many of these luxury properties, which has been mentioned for a long time now has not materialised, and with the ever increasing tax burdon for owners and residents continuing for many a year to come this will not happen.

Sad to say, but we are not going to see any green shoots of recovery in the housing market until Portugal itself gets back to recovery, and by then the buyers will have gone elsewhere. Like many of the Portuguese and foreign expat community have done already.

[widge]

The enquiry boom in real estate agents always picks up from May, and continues through to October. Ironically this also coincides with the build up to the main tourism months, with thousands of holidaymakers wandering around the towns of the Algarve, and dreaming of their own place in the sun.
Many enquire 'Just out of interest', in estate agents, to see whether they could afford such a place. Most can't.

It happens every year, but the sale to enquiry conversion ratio is probably less than 1%, but the agents when asked about how things are moving, always put on a positive spin, in the hope that this will encourage investors to flock to their doors because 'What if all these new enquirers actually buy' they will have very little to sell. Eventually they actually start to believe their own spin.

The market here is on it's R's, and in the area I live on the west side of town, their are more vende se signs going up by the month, and none of the ones that were there already aren't selling either. In fact, there have been several villas that have been for sale for over 3 years and nobody is selling.

The idea that the rich Russians and Chinese were going to be buying up many of these luxury properties, which has been mentioned for a long time now has not materialised, and with the ever increasing tax burdon for owners and residents continuing for many a year to come this will not happen.

Sad to say, but we are not going to see any green shoots of recovery in the housing market until Portugal itself gets back to recovery, and by then the buyers will have gone elsewhere. Like many of the Portuguese and foreign expat community have done already.

Well, if like us, you don't want to sell & you enjoy holidaying in the Algarve it really doesn't matter. Coming out in September for 6 weeks R & R & we won't be going near an Estate Agent!

[dennisg]

I too would like to know the ultra-safe stocks giving 11.2% and 9.7%. I have been subscribing to Investors' Chronicle for the past year and have bought many of their tips for dividend producing shares, but these are probably only averaging 5 to 6%, which is still a lot better than the banks are offering. I bought my house on Rocha Brava (after owning a quarter share for five years) twelve years ago and am confident that I would at least get my money back if I sold it now, and in fact would be disappointed if I didn't make a reasonable profit when I do come to sell. In the meantime I use it between six to eight weeks every winter and it is let for me during the summer, the rental income paying for the maintenance and other costs, and in a good year even paying for some of my winter golf.

[e-richard]

Sad to say, but we are not going to see any green shoots of recovery in the housing market until Portugal itself gets back to recovery, and by then the buyers will have gone elsewhere. Like many of the Portuguese and foreign expat community have done already.

Q1: If those buyers have gone elsewhere, where have they gone ?

Q2: I wonder if the Portuguese economy has much to do with the housing market in The Algarve specifically, or whether that is more of a function of the economies of the Northern European countries who typically supply the buyers ?

I'm trying to build some confidence that as the German, Dutch and UK economies start to emerge from the recession, so will the Algarvean property market - regardless of the PT economy - maybe ?

[widge]

I agree with you that the Algarve property market is largely disconnected from the rest of the Portuguese economy with buyers & sellers being predominantly from overseas.

As for there being a connection between Northern Europe emerging from recession & an upward move in Algarve property prices I'm less sure. I hope that the Algarve tourist authorities & the local camara have the foresight to promote the region as a fantastic holiday destination & maximise the regions attractions for the sake of all local people & stakeholders.

[cereza]

The situation in the Algarve property market is that there are far more sellers than buyers so prices won't be going up for a long time.
If you bought more than 10 years ago you may still be able to get out with a profit but if you are financially secure and want to keep your property then you have no worries - just keep it and enjoy it regardless of the potential loss. The banks hold a lot of repossessed properties which they don't want to show on their books at market value but which they are desperate to sell. As for the Portuguese economy there is a long long way to go before there is any light in the tunnel and I know of many villas owned by people in the North of the country which are on the market or have been repossessed. Sadly anyone who bought in the last 10 years and wants to sell now is in trouble and will suffer losses even if they can find a buyer at all. The UK market has been boosted by government initiatives which will not help overseas purchases and also by speculative buying as protection against expected inflation due to QE - these specs have no interest in buying holiday homes !!! I sold my villa 1 year ago after a long time and the price I took seemed very low but it doesn't seem so bad now and I am so pleased to be out. I have still holidayed in CVO since then and to be honest it was so nice going out without any of the worries of a 2nd house. i will continue to holiday in CVO but just as a renter which I think will prove far cheaper in the short and medium term than being an owner.