May 26th 2010 Should I Buy in Spain? Was I the first to give the warnings about buying in Spain? Looking back at my previous newsletters I find I gave a warning about buying in Spain back in Nov 2007. I gave another warning in Autumn 2008 that it was definitely not the time to buy. Here's another warning. Dont believe those who talk about windows of opportunity. Read on. Let me take you on a journey around Spain. Let's start with Ayamonte. This is a lovely little town where the Guadiana river meets the sea, right at the south-western corner of Spain where it abuts the Algarve. The town is built along the river, and the houses are tightly packed, although there are a couple of lovely squares, tree lined, with seats tiled with old fashioned tiles. There are cafes everywhere, and bodegas. And, of course, just along the causeway is the new tourist development fronting an apparently endless sandy beach with a shallow sea. But go round the hill, below the parador, and come out to a road that snakes along the edge of the Guadiana and you will reach a big new development. It's hardly finished. It is also empty, completely empty. Now go back to the motorway, cross under, and take a right turn off the roundabout. You will come up to a massive new development about the size of Welwyn Garden City. It stretches for miles. There are hundreds of villas, thousands of apartments. There are golf courses, but... there's no-one there. You drive down silent dual-carriageways. There isn't a soul about. There is a shopping centre that has been abandoned. There are about a dozen lonely people living in this metropolis. The rest is empty and silent. But just look how much there is of it..... There's miles more, but hopefully that gives you some idea how vast this place is; and yes, it is all empty. So you tell me how much those apartments are worth. Now make your way down to the coast and follow it round. Town after town is busy. But tourist area after tourist area is empty and silent. From Isla Canela, right the way to Huelva there are tourist developments. They are all largely vacant. If you look in the local paper you will find hundreds and hundreds of plaintiff ads extolling the virtues of thousands of apartments and villas that await some caring owner. They are for sale at breakdown prices. That's all they are worth, there are so many of them. Continue up the Mediterranean coast and you will find the same situation, all the way from Gibraltar to Valencia. The over supply of homes has reached epidemic proportions. It will take a decade to sell them all. Because of the sheer quantity of these properties the prices can only continue to drift lower. Dont be confused by the figures showing that Spanish prices have only dropped 10%. These prices are set against the false figures given to the land registry. For years people have been under-declaring the value of their purchases to keep their tax payments down. The 10% drop is a drop below that under-declaration. In general, house prices on the Spanish coasts are down about 50% in real terms. But even those prices are notional. Buyers are few and far between. Why buy when there is so much choice? Why buy when there is so much risk? Why buy when there is always going to be something cheaper next month? Dont be confused by sellers claiming that now is a great window of opportunity and you should be buying before prices rise. Prices cant rise for several reasons. First, because of the sheer quantity of properties for sale, the market overhang is so great that it will take years before the backlog of available properties is sold. Until that happens prices wont rise. Secondly, Spain is in an economic mess. In Andalucia unemployment is about 30%. You dont get house price rises in a slump area. Thirdly, Spain is bankrupt. It has to borrow €225 billion euros this year just to keep the lights on. No-one is keen to lend because they fear a breakdown of the euro. This will cause the interest rates charged for Spanish debt to rise. This will push the economy into an even worse state. You dont get rising house prices at the same time as a crashing economy. Remember that house prices always lag the economy. The economy must move up before house prices move up. They usually lag the economy by 1-2 years. This means you will get plenty of warning when the time is right to buy. Beware the idiotic hard sell of BMV (Below Market Value). Nothing is ever below market value. What a place sells for is its current value. If it is advertised at below bank valuation that is because the bank is desperate to shift a bad debt, and wants your signature on a mortgage document to make their accounts look better. I know what's going on here, I've sat in on some of the deals. Incidentally, it is illegal in both Spain and Portugal to deliberately sell a property at a known under value. Developers are still trying to push off-plan deals. These are wildly over-priced. I have in front of me deals where developers are trying to sell two and three bed flats for €300,000 and more. Those prices are insanely inflated. Paying more than €100,000 for a two bed flat anywhere in the south (unless you are in some especially hip area) is over the top. Flats in that range are everywhere. Why buy off-plan when the normal resale properties are less than half the price?? One final point: Beware the phrase "instant equity". There is no such thing in a static or declining market. Yesterday's instant equity is tomorrow's equity black hole. Now let's look at the currency risk. There is trouble in euro-land. Putting it simply, most governments have overspent. They are deeply in debt. You probably know about Greece, a country where they have taken handouts from northern europe for decades, and have mismanaged their affairs on the assumption that more money will wing its way from the north to fix any problems. That is going to end, or there is going to be a breakup of the eurozone. German tax payers are providing the lion's share of the bailout funds for Greece. The Germans are not over-keen on the Greeks, and think they are a lazy bunch who should get off their backsides and fend for themselves for a change instead of looking to other people to fund their leisure time. That isn't the only problem. The bigger problem is, how are other countries, already in trouble themselves, supposed to support Greece? There does come a time when some folks start to question how long they have to support their lazier brethren. That time is close upon us. Just suppose Greece cant make the grade. No-one seriously thinks they can, but the political will is there, albeit reluctantly. But if the same problem surfaces again during the next year, what then? And what about Spain? Is Spain the next in line? At the very least a would-be investor in Spain should be considering the possibility that Spain does go bust. That will mean higher interest rates, possibly another bailout, or not. Perhaps a rapid exit from the euro, followed by a swift devaluation of the currency, and therefore a devaluation of your nice new investment. Anyone seeking to invest in the euro-zone should seriously consider investing somewhere else. Even on a small scale, waiting has to be a good idea. I have the chance to buy a chunk of land next door to me. I am going to wait as long as possible before coughing up the money on the assumption that in six months time I will get more euros for my money. You should do likewise. For larger investments I would wait a couple of years at least, or go somewhere else. John

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