Business World

Wednesday 24 April 2019

Quench your appetite for buying property overseas

While investment in property abroad is still strong, it is most likely that European markets will experience a similar slowdown. However, even without the likelihood of price falls, buying overseas is inherently risky

THE vast majority of canny investors have moved out of Irish property. After all, yields are even below deposit rates, while prices have probably not yet hit rock bottom.

But there is still a huge appetite for overseas property investment -- from Eddie Hobbs' Brendan Investments, to villas in golf resorts in Spain and Portugal.

As a result, investment in overseas property is still strong, with Irish investors spending over €4.2bn so far this year, a similar amount as in the same period last year. Investment in the UK accounted for about 65 per cent of this, compared to about 75 per cent last year. But is this wise?

Earlier this year, a survey found that 30 per cent of Irish people believed investment in overseas property to be risky. Crucially, Merrill Lynch also found that many of the rich were moving away from property, with so-called ultra-high net-worth individuals -- people with assets of more than $30m (€22.2m) -- now steering clear of new property investments.

The key point to remember is that Ireland was not alone among world economies in experiencing a housing boom over the last decade. US property prices almost doubled, with coastal areas in particular benefiting. There have also been huge surges in the UK, Spain and in central Europe, mostly on the back of very loose credit.

The FT claimed last week that in Spain, if you are poor and have no credit rating, it is easier for you to obtain a mortgage than to rent an apartment. In the UK, building societies have until recently been handing out mortgages of up to 130 per cent of the property's value, at up to five times an applicant's income. Both practices, it must be said, which fuelled an unsustainable boom.

There is little solace for those who believe that the fall in house prices experienced so far will be the end of the story. Generally, it takes time for house prices to fall, starting slowly before beginning to accelerate.

For example, the Case-Shiller house-price index for the US peaked in the second quarter of 2006.

In the second half of 2006, prices fell at moderate rates, but this year the decline in prices accelerated. It is most likely that European markets will experience a similar path, and thus prices are more than likely to be lower in Ireland, Spain, the UK and across central Europe this time next year.

Of course, there are property optimists who would beg to disagree, pointing in particular to the changed interest rate environment. After all, the markets stalled worldwide in 2001 when rate cuts saved the day.

However, while some cuts are possible and even likely, they cannot be of the same order as 2001. Remember, central banks worldwide have the primary objective of price stability. In other words, they must keep inflation under control. Already there are signs that inflation is picking up in the US and the UK as well as here at home.

Oil and commodity prices are setting new records and gold has reached a 27-year high -- which is as good a prediction of inflationary expectations as any central banker could hope for.

Even without the likelihood of property price falls, buying overseas is inherently risky.

There are different legal systems -- witness the Spanish villas hit by official demolition notices -- and different taxation systems.

There are also hundreds of people out there who bought into developments that either did not happen or were substantially different to what was claimed in the prospectus. Still others have found they simply cannot sell their pad with hundreds of new apartments going up around them (or worse still, some industrial facility).

Many people also assume that an area will continue to do well simply because it is a Ryanair destination -- but the airline can and does pull routes, often to the huge frustration of holiday-home owners in the area.

Remember too that overseas property is essentially an unregulated investment. Charges and commission are not necessarily disclosed and even if your agent offers a guaranteed rental income over a certain period, that is usually paid for with an artificially inflated asking price. Promises of significant capital growth are often common but, of course, no such promise can actually be made.

Finally, be very cautious of buying outside the eurozone as you risk being hit with the double whammy of rising interest rates and a local currency moving against you.

All in all, now is not a good time to buy property. Unless, of course, it is not an investment decision and you simply want to live or holiday in the pad and enjoy it.

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