I drove from Edinburgh to Gleneagles this week to interview a golfing fund manager. It was utterly miserable.
Gleneagles itself it perfectly nice as long as you aren't offended by the fact that the price of its coffee and its Range Rover-jammed car park offer final proof that recession is for little people. But I drove up in the drizzle and I drove back in the rain. Passing the golf course, I saw a few pairs of shorts. I wore jeans and kept my coat on.
As I sat in the long stretch of roadworks on the M90 back to the city, I found myself thinking of southern Europe of Spain, Portugal, Italy and Greece. Not of their banking crises turned debt crises, but of their increasingly cheap property markets.
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Go tothe Costa del Sol, and you can buy a riverside farmhouse with a pool and 3.5 acres (plus two self-contained apartments) for €248,000. If you want abeach, you can have a four-bedroom town house for €120,000, or a two-bed flat for €60,000 (some blocks are down 70% from their peak prices).
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Go to Greece, and prices are just as low. My eye is caught by a seven-bedroom villa hanging on the edge of a cliff in Corfu. It's got a pool, a dreamy view, proper gardens and an attached flat. It's €490,000. If that's too much, apartments at €50,000 can be found everywhere.
It's the same story in Portugal. Here, I am taken with a perfect-looking five-bedroom villa listed on rightmove.co.uk. According to the website, it comes at a "fantastic price" of a mere €329,000, against a bank valuation of €400,000 and apparently I will be able to "resell this property with minimal effort at a very good price as soon as the market picks up." However, it is here, in the words "as soon as the market picks up," that we meet the problem and the reason I am driving around Fife with the windscreen wipers on rather than viewing villas in the sun.
There is no reason to think that the property markets of these countries have hit bottom. Take Spain. Look at the historical relationships between house prices and wages, or house prices and rents, and you will see that the ratios still haven't reverted to the mean. At the same time, mortgages are hard to come by and, with unemployment at 23%, it is clear that while there might be plenty of sellers there are anywhere from 700,000 to 1.4 million unsold housing units in Spain, depending on who you listen to there aren't so many buyers. I think we can expect further falls.
But, even if by some UK-style miracle of forbearance and money printing, prices don't fall further in euros, they are all but guaranteed to keep falling in sterling and dollars as the euro falls to a value that represents the mishmash of madhouse economics it represents. Back in 1999, the euro traded at parity with the dollar. It doesn't take much imagination to see it heading back there (you currently get about $1.25 for a euro). And, if the euro breaks, non-residents holding houses in the weaker economies will find themselves even poorer in their own currencies. You can expect the new currencies of Greece, Spain and Portugal to fall further than the euro ever would have, as the euro represents some strong economies, too.
But the potential for capital losses isn't the only reason to think twice before you join me browsing Rightmove. Remember that the core problem in Europe is too much government debt. What do governments in debt do? They raise taxes. And the easiest targets for new taxes? Things that can't move.
In 2009, Ireland introduced a new tax on 'non-principal private residences' (NPPR) it will be €200 this year; it has since introduced a €100 a year 'household charge' on all homes. Last year, Greece introduced a new emergency' property tax to be paid via electricity bills - it added up to around €500-700 for a typical household -and non-residents are not exempt. In December last year, Italy also introduced new property taxes.
So far, none of these taxes are high in absolute terms, and there has been no effort on the part of struggling states to target non-resident holiday-home owners in particular. But if I were running a near bankrupt state, I think these well-off non-voters would be near the top of my 'who to tax next' list.
Finally, there is the matter of capital controls. There is a general consensus among the bears that, at some point, the movement of money around the eurozone will have to be restricted to prevent bank runs and to allow countries to leave the euro. If that happens, not only will those who have bought property in the countries in question be nursing nasty capital losses and tax liabilities, but their capital might also be trapped abroad.
On the plus side, the difficulty in selling houses has forced more owners into the rental market. So, instead of tying yourself up in administrative and financial knots buying a villa, this might be the year to rent one.
This article was first published in the Financial Times.
