Pick up a bargain holiday home in the sun - but beware the sting in the tail

Prices of dream properties on the Med have well and truly crashed. But new and rising taxes should give you pause for thought, says Merryn Somerset Webb.

If you are just back from your summer holidays, you may well be thinking about houses. You may be thinking about how nice it would be to own a little house in France, Greece, Turkey, Italy, or perhaps in Spain. You'd save a fortune on hotels, you'd be able to go to the same place every year, you could buy stuff in markets guilt-free, knowing that you had a local house to furnish, you could make money by renting it out when you weren't there, and, of course, having a holiday home would mean that, when discussing your holidays, you could refer to "our villa". It all just sounds like bliss.

Read the newspapers and you will think that, right now, it is also bliss on the cheap. If you wanted a beachfront home back in 2007, says the Sunday Times, you had to be a millionaire. No more. Some of the "most beautiful and popular stretches" of Mediterranean coastlines are in the areas that have been hardest hit by the economic crisis. That means "there is no need to compromise on location any more". You can have a lovely new-build flat by the sea five miles from Monaco for a mere £120,000. You can have a new two-bed townhouse just down from St Tropez for £474,000, and, if you go to Brittany, there's a detached house with panoramic sea views near the "pretty harbour town of Morlaix" for just £208,000.

Of course, you don't even have to spend that much. Prices are down 30% in some places, and £50,000 can get easily get you a "rustic-style property in a rural location". In Sicily, says another gushy piece in the Sunday Times, you can buy crumbling homes for £5,000, and even a renovated flat in the charming village of Cianciana will cost only £60,000. The Independent fancies Greece, where £50,000 can get you a nice studio apartment by the sea in Crete.

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However, for a real bargain there is Spain, "the poster child for cataclysmic property crashes". Prices are down 30-50%, and in some places up to 80%, and there are half-finished developments in repossession all over the country.

Much of the stuff for sale is rubbish, but there are, say almost all commentators, still relative bargains to be had. The top one at the moment is Lugo, an entire village in northern Spain, says Graham Keeley in the Independent. It is advertised as having six buildings and a hectare of land. Yours for €62,000. Not got that much? Here's a pretty house for €32,000. Otherwise you can get yourself a charming two-bed flat on the Costa Brava for €55,000, a town house for €100,000, or something in Barcelona for a 50% discount on 2007, says a similar piece in the Independent on Sunday.

The Telegraph has also been wondering if "now is the time to strike". Their answer? Probably. "Olive groves, sunshine, hot tapas, cold wine: Spain's charms will outlast their economic crisis, and many to come. These prices on the other hand, may not."

So, should you follow your holiday dream and buy abroad? I wrote on this last year here. Things have changed slightly since then in that a lot of prices really aren't bad. Most of Europe has had a proper crash (the UK really is the odd one out here), so if you buy a good house, you are unlikely to suddenly lose 20% of your capital (in euros at least when the euro finally collapses, however, you will find you have lost rather a lot in sterling). Even the market in Portugal appears to have begun to stabilise.

What you might find, however, is that owning another house makes something of a dent in your income. You need to worry about all the legal issues that have hit buyers over the years of course. But at the moment, you also need to budget for new property taxes.

There has been a recent rise in the 'social tax' in France. More on this hereand here. Ireland has raised taxes too, and almost everyone else is talking about it. Note that, while the Italian prime minister has just agreed to cancel the introduction of a new property tax this year (under pressure from Silvio Berlusconi), it is likely to be reinstated next year. After all, if you need money, the easiest things to tax are things that can't move.

I'll write more on this in a few weeks, but if you are thinking of buying a house abroad, you might want to factor rising tax rates in alongside rising interest rates when you are doing your affordability sums.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.