House price decline reignites Brits' zeal for property abroad

Has Brits' enthusiasm for a place in the sun been reignited? Linton Chiswick questions whether there are really bargains to be had in places like France, Spain and the US.
Putting aside regional variation, UK property prices appear to be on the slide as the year draws to an end. And with lending likely to remain constrained into 2011, unemployment on the rise and an imminent VAT increase that will help bolster inflation  (and add to pressure to raise interest rates), the outlook for UK residential property is unlikely to promise much in the way of capital gains. But what about prospects abroad?
By the time the debt crisis hit, almost half a million Brits owned foreign properties, half of them in either France or Spain, many of them the very over-priced, under-designed newbuilds that played their part in the market emergency. It’s no coincidence that the last time it was possible to talk about the investment potential of overseas properties without provoking worried glances, the 'PIGS' countries were attracting much of the heat. Debt built their property markets, now it’s slowly dismantling them again. And yet – so raised are we on the faith that there’s always a house somewhere that will make us money – we might just be property shopping abroad once again.

Window shopping

According to Primelocation International, web searches for Spanish real estate increased 43% this year. Primelocation interprets the data as window shopping with a view to buy. For all we know it’s a 43% increase in the number of investors tremulously calculating the current value of their own properties and wondering at what point they can sell and suffer scorched fingers rather than the full 3rd degree.
The message from the industry is that there are bargains to be had. Mass repossessions by Spanish banks, following sour deals with property developers, mean discounts of 25% and more. But 25% of what? If a 25% discount is what it takes to draw a potential buyer to Primelocation, isn’t the conclusion that property is still 25% overvalued? The Spanish property register reports an increase of 13% in transactions in the third quarter of 2010 compared to 2009. But the increase is from a low base, and a recent survey of Spanish developers didn’t reveal much optimism. Ninety-five per cent described business as worse than it had been four months earlier; 87% didn’t expect the situation to improve next year. With pressure to raise and refinance a colossal amount of debt in the new year, the country’s Moody’s credit rating is currently tottering.

Value rather than trendy locations

And yet Spain, where property’s taken a hit, has overtaken France, (traditionally – and as recently as April – Primelocation’s most popular international search location with the Brits) and leads it by 20%. The French property market hasn’t suffered nearly so badly. The implication is that the foreign market is being driven by perceived value rather than fashionable location.
And there’s no greater evidence of this than the sudden fascination in the US’s decimated residential property market. Primelocation searches for American second homes grew 90% in the last 12 months to challenge Spain for second spot. There are stories of Brits on business trips to Florida, unable to believe what they read in the local property pages, returning home with Miami Dolphins t-shirts for the kids, duty free perfume for the wife, and a $70,000 apartment in trendy South Beach. According to American house price indices, prices in Miami have halved since their 2006 peak.

US 'repo-bargains'

British investors, too, are being targeted by US-based companies offering repo-bargains in less glamorous locations (Detroit, anyone?), for as little as £30,000 with high (promised) rental yields. Raised on the UK market, it’s hard to imagine going wrong buying a £30,000 house. But it is.
US foreclosures are running at around 25% of all residential sales. Unemployment remains alarmingly high, the banks own disproportionately high numbers of properties in forceclosure hotspots like Detroit and (parts of) Florida, and – unlike the UK – there’s plenty of space to go around. Under these conditions, it can take a very long time for a region to dig itself out of its economic doldrums; if, in fact, it does at all.
The Spanish and American markets might be getting the action (although I’d suggest a lot of that action is PR-based rather than economic), but nobody’s making money yet. Volume may be up in Spain, but – according to the most recent Knight Frank Global House Price Index – prices are 3.7% down on the year. (Add that to a further two years of falling house prices and there are approximately half a million Brits currently losing money there.) In the US, a modest 0.6% rise doesn’t represent the repo-torn neighbourhoods combed by bargain hunters. In Florida, prices are 20% off, and for every enthusiastic realtor, there’s an analyst wondering whether Detroit or Florida prices will return to their 2006 peaks within current investors’ lifetimes.