CHAPTER TWO: WHERE TO BUY ABROAD – ANALYSING MARKETS

Synopsis:

Chapter Two gives a thorough analysis of the workings of property markets and the factors which cause market growth. The chapter examines potential events which cause price movements and gives a number of case studies of topical market forces. The benefits of EU accession are explored, with a focus on the Irish experience and accessions in Eastern Europe as well as a discussion of the importance of timing in property deals with regard to future accessions.

The chapter then moves on to discuss other forces, including an analysis of the impact of low-cost airlines on a property market and the effect that international events such as the Olympics can have on a market. Growth and how to spot when it is sustainable is then explored, along with tips on how to decide whether a market is overvalued or undervalued. This section includes an explanation of the price to earnings ratio, occupancy and ownership rates and the affordability ratio and their impact before looking at market cycles as they move from boom to bust and back again. Finally, the chapter looks at considerations which should be taken into account when looking at different types of market, choosing between city and country and resorts dealing with ski and beach holidays.

Extracts:

“Just like the price of any asset or commodity, the value of property is based upon the concept of scarcity. Simply put, the supply of any resource is finite (there will be a limited amount of land and therefore properties within a city). Thus the more market demand there is for it, the more its price will rise. This is the principle of supply and demand; the two concepts that make market economies work. Supply and demand determine the availability of every commodity or asset (including properties) and the price at which it is sold. This principle is fundamental to the analysis of property markets; if you want to know how any event will affect the property market you must consider the implications of that event on the supply of property and the demand for property.”

“Personal perceptions of where is a desirable place to live mean that markets can be so subjective that prices which are acceptable in one town are regarded as outrageous in the next. That doesn’t make property markets unpredictable; it simply means that we need to be aware of the factors that make one location a more desirable place to live than another.”

“From an economist’s perspective the biggest problem with property markets is that they are so localised. Property markets are more influenced by local factors affecting supply and demand than they are by broad economic trends. According to The Economist, ‘Fluctuations in property prices can arise not only owing to cyclical movements in economic fundamentals, interest rates and the risk premium, but also as a result of the intrinsic characteristics of the property market itself.’”

“Financial advisors always tell us that past performance is no indicator of future performance, but it is a good place to start. You will see in a later case study what EU membership did to property prices in Ireland and why, therefore, many people expect the same results in current and future entrants. EU entry provided Ireland with investment in infrastructure and increased its levels of trade. Both these effects will also be felt by more recent entrants. However, whilst the Irish experience suggests that Eastern Europe will experience significant growth, we can not simply map the Irish experience onto other countries.”

“Anyone considering buying property in Eastern Europe will be well used to predictions that property values will grow at a rate of 5-10% every year until accession, followed by an immediate doubling of values on the day that integration is formalised. Working on the principle that any prediction taken so seriously and allotted such attention is always worth questioning, the section below examines the true benefits that lie behind EU accession, helping you to work out just how much of a difference it will make to property prices.”

“The Open Skies Agreement in the European Union has done a great deal to promote cheap flights. Figures released by the UK Civil Aviation Authority show that the numbers of Britons visiting the Czech Republic rose by 59% in 2004, an additional 770,000 people. Visits to other new EU states, including Hungary, Poland, Slovakia and the Baltics, almost doubled. Tour operators also noted that bookings for 2005 showed an increase of 96% for Poland.”

“Within any property market, there are three general types of buyer; end users (people that want to live in their property all or some of the time), investors (people that want to let their property out for profit) and speculators (people that buy in the anticipation that prices will rise). Thinking about market participants in this way allows us to make better judgements as to whether the market we are analysing is experiencing growth based on economic fundamentals or whether it is a bubble.”

“An excellent example of speculation leading to a bubble followed by a crash is the Asian Economic Crisis of 1997. This particular economic phenomenon was only partly related to real estate investment but it did play a part. Once speculators lost faith in the markets of South East Asia they pulled their money out. The result: stock markets in the region crashed, currencies plummeted in value and the real estate markets went into free fall.”

“It goes without saying that the best property investment is in a property which is currently undervalued and set to increase in price. The difficult part is knowing whether a market is undervalued, overvalued or valued correctly. Knowing whether a market is valued correctly is a good starting point when considering where to invest. Undervalued markets will not always increase in value but normally will. Overvalued markets may not necessarily fall. Just because a formula says that a market is overvalued it doesn’t mean that people will stop buying. However, an overvalued market does not make a good investment.

There are formulas which help us to identify anomalies, compare markets and to make a decision on whether a market is ripe for investment or about to crash. Two key tools discussed below are the price to earnings ratio and the affordability ratio. It is also important to look at vacancy rates and the ownership ratio. We have focused on these because they are measures which allow us to connect a property’s price with its underlying value as an asset and its underlying affordability as a home.”

“When prices do fall, the slump in the market can usually be predicted. Prices may have become wildly unrealistic or external factors, such as high interest rates, will have had an impact. Soaring interest rates were the primary cause of rampant negative equity in early 1990s Britain. House prices in the South-east of England fell 27% and more than 1.7 million households suffered negative equity after interest rates climbed to 15%.”