First published: March 29th, 2005
Last updated: April 12th, 2007
Let me be clear: there will not be, from my point of view, a bursting of a real estate financial bubble. Since I reached the age of reason (if I ever reached it), I never saw the prices of the real estate breaking down. At most a temporary small decline from times to times.
In the beginning of the Nineties, the canton of Vaud (Switzerland), has undergone a similar experience. After twelve years of real estates prices overheating, the prices had reached such a level that nobody wanted to buy any more (nor could they). As a result, a consolidation (7 to 9% prices reduction) then a stabilisation of the prices was observed. Today, twelve - thirteen years later, this stability goes on, and it will probably last until the purchasing power more or less catches up with the property market.
Villa vaudoise. © http://www.nord-immob.ch/
Obviously, there were here and there some resounding bankruptcies, in particular among those who had made the real estate speculation their main activity and... among their bankers, who briskly lent up to 110% of the "value" of the building !
In this respect, it is advisable to speak of price and not of value: when I lived in Switzerland, there was in front of the apartment I was living in, a potato field (or corn, according to the year). This one was constructible, but its owner was asking one thousand francs (650 euros) per square meter (some 40 pounds per square foot, be it with corn or potatoes). Here, and unless this field concealed gold nuggets instead of potatoes, the price was not really related to the value…
← "Dear" potatoes
From 1993 to 2003, the prices in the Spanish real estate market doubled. Since the second quarter of 2004, a stabilisation of the prices is observed, and even a slight decline. In the field of the second home, more volatile than that of the main home, it is possible to imagine that this trend will continue. But the fall is rather likely to stop quickly.
Of course, by playing the "aircraft game", there will be, here and there, some crashing to pieces landings, where the plane will have neither wings nor propellers any more. I think in particular of certain huge developments, started in the speculative enthusiasm prevailing two or three years ago (for example, simultaneous construction of a half-dozen of golf courses supporting thousands of residences proposed at ransom price) where the developer now should feel some concern.
The developer… and also his customers, insofar as they have advanced an installment of reservation, and the bankers who might have given a guarantee on this installment. About the latter, I am not too concerned: if the situation were to become really serious, it is probable that an army of lawyers will seek the means to reduce the range of these "guarantees".
But on the leisure residence in the second hand market, most of the consolidation seem to already have taken place. Currently, whoever really wants to sell, comes to see us spontaneously, to propose a price-cut, that we readily accept: our trade is to sell, not to observe the market "while waiting for the things to change". One year ago, these spontaneous price cuts were especially proposed for top-of-the-range houses. But since December 2004, we also receive them on more current properties.
And the properties which currently enter into the catalogue do it at much more reasonable prices than only two years ago. An example: we had (April 2005) a detached villa for sale in Denia, with swimming pool and some sea-view. I know the prices charged eight years ago for a similar property: thirty million pesetas, some 180'000 euros. This (renovated) property today is offered at a some 50% higher price, but it is not the double. With compound interest, this makes an annual rate of 5.2%, i.e. a little more than the general inflation rate: a good gilt-edged investment.
Another factor which, in the past, sometimes caused a fall in the prices of the real estate properties in Spain has been a brutal rise of the rates of the mortgage loans. Many investors, who mainly invested the money of their lenders, the banks, had to "get rid" of their stocks (literally speaking), by lowering their prices, thus avoiding to have to face astronomical interests invoices (up to 20% per annum, sometimes more). These true "sales" involved a general downward movement of the property prices.
These general rises of the interest rate (which were reflected on the mortgage rates), were decided by the Bank of Spain, in order to contain a rampant inflation, while preserving the attraction of the peseta as an investment currency. Since then, Spain entered the euro zone. And as long as the euro zone will pay for the German reunification first, and the European reunification then, the risks of economy overheating will be excluded, as well as the need for measures intended to fight an inflationary threat.
Consequently, which is the best time to buy ? Again, nobody knows. But it is not to be excluded that the least bad time, failing to know the best, is now. A consolidation took place, prices are unlikely to rise again soon, but neither are they very likely to decrease further. By waiting, the purchaser is simply likely to see sold to another, the property which interested him so much.
Morges, March 2005, 29th, J. Gaillard et al.
About another topic (the constitution of a company in a tax or bank haven whose only goal is the detention of a real estate, item published in French only) I announced in 2002 the probable disappearance of Gibraltar as a place of predilection for this purpose. Today, it is done, since the British colony received a ten years (until 2015) delay to "harmonize" its taxation with the average of the European legislations. Equally, I think that the forecasts above present a reasonable degree of realization.
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