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Expat Briefing Editorial Team
07 August, 2013
The longest and deepest property market correction in recent history has been ruinous for some investors who bought second homes and investment property in the years prior to the financial crisis, especially in certain parts of Europe. However, for new investors, some suggest that now is the ideal time to buy.
The Global Property Scene
Average global house prices rose 6.6 percent in the year to March 2013, the highest rate of growth since the second quarter of 2010, according to the Global House Price Index published by Knight Frank, the international estate agency and property consultancy.
Of the 55 housing markets tracked by the Knight Frank index, 35, or 63 percent, recorded an increase in mainstream property prices in the year to March, and the index now stands 14.7 percent above its recessional low in the first quarter of 2009.
Property prices in all world regions, except Europe, increased in the year to March with the Middle East performing best, rising by 10.6 percent on average.
Knight Frank’s research suggests that even in territories where policy makers are attempting to cool the property market, mainstream house prices are surging ahead, most notably in Hong Kong, where the Government has introduced special stamp duties to deter speculative transactions, and China, which has used a number of measures to achieve the same objective, and which is rolling out a nationwide property tax.
Both of these markets recorded price rises in the first quarter despite a raft of measures to curb escalating prices. Prices in Hong Kong are, on average, 28 percent higher than they were a year ago and in mainland China prices are up by 23.8 percent in the 12 months to June 2013 (and by 10.7 percent in the first quarter alone).
Greece, Hungary and the Netherlands occupy the bottom three rankings this quarter having seen prices fall by 11.8 percent, 9 percent and 8.3 percent respectively. But Europe’s difficulties don’t end there – aside from Japan and South Korea all the countries that recorded negative growth in the 12 months to March were based in Europe.
Knight Frank says that despite its resilience in the aftermath of the financial crisis, the Dutch market is now starting to flag, with prices falling by 8.3 percent in the year to March 2013. Rising household debt and growing unemployment has been blamed for this decline.
Bright spots on the European property landscape include Ireland and the United Kingdom. In Ireland, prices are no longer tumbling at double figure rates, and Knight Frank’s index shows that house prices there fell by just 3 percent in the year to March 2013, compared to a 16 percent decline a year earlier. The UK’s property market is also improving, with prices rising by 0.2 percent in the year to March to stand 8.9 percent above their low in in the first quarter of 2009.
In other regions, the property markets in South Africa and the United States are stand-out performers. Prices rose by 11.3 percent and 10.2 percent respectively in the year to March, up from -3.2 percent and -1.9 percent a year ago. South Africa’s momentum is linked to an increasingly wealthy middle class who are tapping into the rising confidence of the wider African continent, keen to get on the property ladder.
In the US, prices have now risen for 12 consecutive months boosting consumer confidence which hit a five year high in May.
However, it was the Middle East region that performed best in the year to March 2012, with house prices rising by 10.6 percent on average. In Dubai, house prices ended the first quarter of 2013 9.2 percent higher than the last quarter of 2012, and rose 21.1 percent in the year to the end of March 2013.
Buying Opportunities in Europe?
Analysis by iExpat.com concurs with Knight Frank in that house prices across Europe have been falling steadily over the past 12 months. It says that house prices fell by an average of 0.6 percent across the European Union in the first quarter of 2013. However, homes in the single currency zone fell by even more, 1 percent.
Spain suffered the worst, with a decrease of 12.8 percent in the first quarter of 2013 compared with the first three months of 2012. Meanwhile, house prices in Portugal fell by 7.3 percent.
Many of us have heard the horror stories of expats buying their dream retirement home or holiday bolt hole in places like Spain at the height of the property boom, only to see the value of their nest egg evaporate in a matter of months as the credit crunch, followed by the Eurozone debt crisis, took its toll on real estate markets.
Some housing developments in Spain are now going for a song compared with their pre-recession prices as banks seek to offload their bad investments, and it is possible to buy some properties at discounts of 70 percent or more on their peak values.
On the other hand though, how does one know anymore what a fair value is for a house or apartment in a market like Spain where properties were so obviously over-valued just before the crash?
A recent study by the Organization for Economic Cooperation and Development (OECD) sheds some light on the current value of property in a number of key real estate markets. In the case of Spain, this study, which compares prices with local wages and rents, and compares current house prices with long-term price trends, suggests that the market is still somewhat over-valued, by about 15 percent.
The OECD’s calculations show that at the moment, Belgium is the most over-bought market, with its price-to-income ratio revealing that houses are 50 percent above their true value. Surprisingly perhaps, France has the second highest price to income ratio, of over 30 percent, suggesting that property prices have a lot further to fall. The UK is not far behind France, although a lack of new housing could account for the UK market’s relative buoyancy.
Interestingly, the OECD report shows that Ireland’s market is now undervalued by about 10 percent, meaning that it could well be a good time for investors or expats to consider buying property there, although this is no guarantee against prices continuing to fall, especially as the country is still recovering from its own financial and economic crisis. The two most undervalued markets according to this measure are Germany and Japan where price-to-income ratios are -11 percent and -38 percent respectively.
House prices appear broadly correct in the Unites States, where prices have started rising again after a substantial correction, as well as: Italy, where prices are falling rapidly; Austria, where prices are rising; and Iceland, Korea and Luxembourg where prices are roughly flat.
Broadly, houses appear undervalued and prices are still falling in the European countries hit hard by the crisis – Greece, Ireland, Portugal, Slovenia, Slovakia and the Czech Republic – but also Japan.
Perhaps the most interesting markets from an investment point of view are those which appear undervalued, but where prices are rising, and the only two countries which feature in this category are Germany and Switzerland, two European countries where strong growth in household disposable income and favourable financing conditions have boosted prices.
Canada, Norway, New Zealand and, to a lesser extent, Sweden are the markets where houses appear overvalued and prices are continuing to rise.
Nevertheless, despite this disparate picture, David Retikin, Director of Operations at Pryce Warner International Group, the UK-based provider of financial services to expats, believes it is a good time for those thinking about buying a house in certain undervalued markets to take the plunge.
“House prices, particularly in Spain, have been dropping steadily for several years, which is great for those looking to buy a home, but terrible for investors,” he observed. “The good news is that the market appears to have bottomed out, meaning now is the best time to buy as prices will start to creep up again over the next few years.”
“Property in Spain is very cheap at the moment, and while the Spanish economy is struggling to pick up, once it does the value of those properties will increase again,” he added. “Despite the problems there, it is still justifiably a very popular place for expats to move and/or retire to, and with property prices this cheap, now is really the time.”
Certainly, interest from foreigners continues to buttress the Spanish property market, and just over 8 percent of all properties sold in Spain in 2012 were to foreign buyers, which equates to just under 27,000 homes. This percentage is almost double the 4.24 percent of Spanish houses bought by foreigners in 2009, and is a possible sign that confidence is beginning to return to this market. Indeed, the 2012 figure is almost back to pre-crisis levels; in 2006, a shade under 9 percent of homes sold in Spain went to foreigners. Buyers from the UK continued to head the list of foreign property investors in 2012, with just under 4,500 homes being sold to Brits in 2012, followed by buyers from France, Russia and Germany.
David Retikin does add a note of caution with respect to the Spanish market however, pointing to a rise in the number of property scams targeting expats, and the latest incidence of these is the issuing of false energy certificates. All houses in Spain now need to have an energy efficiency certificate and some people are conning expats with unqualified assessments and guaranteed ‘A’ ratings.
Others are warning that that the actions of the Spanish Government could threaten to scupper any semblance of a real estate market recovery, especially its imposition of new asset reporting rules. Under these requirements, all Spanish tax residents must report financial assets outside the country worth EUR50,000 to the finance ministry. However, it is said that uncertainty surrounding how to comply with the new rules, and the severe financial penalties for those who don’t, is putting some foreign buyers off purchasing property in Spain.
It sounds obvious, but expats looking to buy a foreign property as a place to live, a second home or an investment should research this area thoroughly before making the purchase. Independent advice from a consultant with expert knowledge of the market where you intend to buy is also a must. As we can see from the example of Spain, buyers not only risk the value of their property falling, but tax traps set by governments also lie in wait to trip up the unwary house buyer.
Many pages of helpful information on the tax rules, including property tax rules, in over 70 jurisdictions, can be found on our partner website, www.lowtax.net.
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