Beware the pitfalls of foreign property

I WATCHED a property programme on TV last Tuesday. Nothing new about that, you might think like much of the nation I am obsessed with the likes of Location, Location, Location but you would be wrong. This one was different. Instead of being about how you absolutely must, right now, rush out and buy a house somewhere (Bansko in Bulgaria, Dubrovnik in Croatia, wherever, just buy), this one was called Selling Houses Abroad, and it actually looked at the horrible downsides.

There was the sad tale of a couple who had used their life savings to buy a flat and a patch of land to build on in Montenegro or thought they had. In fact, despite having paid more than £160,000 over three years, they had actually not bought anything. Neither property was in their name and their "agent" had managed to get another large sum of money out of them by saying that if they paid some "taxes" in advance he would be able to sell "their" land on for £750,000.

Then there was the couple in Spain who could not sell their terraced house because it was three years old, and such is the glut of property on the Costas that you can buy brand-new ones with views over shiny, green golf courses for less than they needed for theirs.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

And finally, there was the elderly English couple in France who had paid far too much for an uninhabitable house after not having a survey done and not understanding their contracts.

It was all deeply depressing, if a welcome relief in some ways from the endless optimism you usually see on property TV.

Buying property abroad: why you can lose with property

The worrying thing is that I think we are soon to hear an awful lot more stories like this. There are always scamsters and incompetents about in markets, so it is not necessarily the Montenegrin or French stories that should scare us (although they should, of course, remind us to be cautious).

Instead it is the Spanish one that is worrying. The whole buy-abroad boom has been predicated on one simple promise: you cannot lose with property.

But the truth is that you can just ask the would-be sellers on the Costas. With house prices having risen well over 250% across the country over the past decade, it never occurred to them that they might have trouble selling. But that is exactly what has transpired.

There has been a building boom all over Spain in the past few years; more new houses have appeared there than in France, Italy and Germany combined, and in the south it seems that there is a golf course or marina development of some kind every few kilometres.

Low interest rates and a huge expansion of what is in effect a sub-prime mortgage business (lending large amounts to low earners on variable-rate mortgages) have kept the boom going for years, but today there are already more sellers than buyers in some areas.

And as interest rates keep rising (both in the UK and Europe), and the many people who have overstretched themselves try to get out, that imbalance is going to get worse.

Buying property abroad: understand the market

It is a similar story in France where a record number of new houses were put up for sale last year, where one in 20 buyers last year were foreign (that is double the ratio of 10 years ago) and where house prices actually fell 0.6% in January.

By weird coincidence, I happen to know the surveyor who was called out to look at the miserable state of the house near Carcassonne bought by the elderly couple mentioned earlier, so after the show I called him.

Do you see this kind of incompetence often, I asked? "Yes." So a lot of English people pay too much for their houses? "Yes."

And what about when they come to sell? The answer to this was more complicated.

Basically, there are lots of regional housing markets in France and you need to look at them separately.

Prices in the north have been falling quite fast over the past year. But in the south they have been much more stable. So it's fine to buy in the south? Well, not really. Apparently, just as is the case with Spain, there are more sellers than buyers only it is not nearly so extreme.

Most of the sellers are unpanicked owners of second homes who are not in a rush to sell and have therefore not lowered their prices "they'd rather wait, however long it takes". No good news there then.

Buying property abroad: things are worse in Florida

But as bad as you might feel, if you own an identikit terraced home on a fading Spanish development, just be glad you didn't buy in Florida at the peak of the US housing boom because things are much, much worse there.

Every time the market announces that the worst is over it gets hit with another nasty number foreclosures are rising fast, there is more than eight months' supply of new homes on the market, and so on.

And in Florida, the state most loved by British buyers, things are particularly bad. Having more than doubled over the past five years, prices are now coming down official statistics show they fell by 2% in the last quarter in the Naples area alone, A friend told us last week that with London house prices out of his reach, he thought he would buy abroad to get his foot on the ladder. We suggested he might do better not to have his foot on the ladder at all, particularly anywhere by the sea.

First published in The Sunday Times 1/4/07