Monday 18 December 2017

A eurozone break-up could prove to be just the ticket for second-home buyers

Prices are coming down in Portugal even from a low
base. The weakening euro is making prices even more
attractive for dollar investors
Prices are coming down in Portugal even from a low base. The weakening euro is making prices even more attractive for dollar investors

Felix Salmon

THE lengths to which I'll go for my readers: I'm sitting poolside in an Algarve villa, enjoying a perfect climate and gorgeous view of the Atlantic, and wondering if this could be one of the best ways for investors to play a possible eurozone collapse.

The 'Wall Street Journal' recently ran a big article on the way that second-home prices in the eurozone periphery have been falling dramatically of late, especially in Greece and Portugal.

And in Portugal, especially, they're coming down from pretty low levels since the country never had a property bubble to begin with. On top of that, the weakening euro is making prices even more attractive for dollar investors.

But wouldn't a eurozone break-up be very bad news for second-home buyers? Here's the 'WSJ': "Fear of a revalued euro, or even the extremely unlikely possibility of some countries losing their membership in the eurozone, continues -- either of which could dramatically devalue any current purchase."

I'm not at all sure. Property is a real asset, which tends to hold its value reasonably well over time -- even during devaluations. Look at home prices in Buenos Aires after Argentina's devaluation -- they didn't fall much in dollar terms.

But the situation for investors could be much better than a modest decline. Nouriel Roubini, talking about how to structure a Greek exit from the eurozone, said: "This process will be traumatic. The most significant problem would be capital losses for core eurozone financial institutions.

"Overnight, the foreign euro liabilities of Greece's government, banks and firms would surge. Yet these problems can be overcome.

"Argentina did so in 2001, when it 'pesified' its dollar debts. America actually did something similar too, in 1933* when it depreciated the dollar by 69pc and repealed the gold clause.

"A similar unilateral 'drachmatisation' of euro debts would be necessary and unavoidable.

"Major eurozone banks and investors would also suffer large loses in this process, but they would be manageable too -- if these institutions are properly and aggressively recapitalised."

Nouriel's point is well taken: there's a long history of countries successfully devaluing their way to economic recovery, with Iceland being only the latest example.

When that happens, lenders take losses. And when lenders take losses, borrowers gain.

Here's my point: in the event of a Greek devaluation, Greek mortgages would be drachmatised. And similarly, if Portugal were to leave the euro, Portuguese mortgages would be escudified.

Second-home owners, instead of paying interest on their mortgages in euros, would switch to paying in devalued drachmas or escudos -- an enormous overnight savings, which would continue for the duration of the mortgage.

A devaluation by Greece or Portugal would involve a big, one-off write-down by lenders to Greek and Portuguese borrowers, and a concomitant one-off gain by those borrowers.

If you have a mortgage in Greece or Portugal, that's a great way of becoming a borrower in that country. Yes, getting a mortgage is non-trivial, but it might well be worth it.

* The 'FT' actually printed 1993 here, not 1933, but it's clear what Nouriel meant.

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