Tuesday 15 May 2012

GREECE: IMPACT OF POLITICAL CRISIS ON ITS PROPERTY MARKET


The German and Italian experiences give clues

A company with a vested interest in boosting holiday home sales claims property prices in Greece will become 50 per cent cheaper for those buying in pounds, dollars and other currencies if the country leaves the eurozone. Those people with an eye for a Greek island hideaway may say "lovely jubbly". But wait, life is not that simple, especially when it comes to the eurozone crisis.

Yes, Greek property may become considerably cheaper if the country exits the euro and a greatly devalued drachma is re-adopted, but that could be the next link in a chain of events that sees it become next to worthless.

In political science there is a theory called Polarised Pluralism. It is not a theory you would want applied to your country. Unfortunately, Greece is becoming a text book example of it. It goes like this - a political system becomes dysfunctional when voters leave the centre ground to support parties at the extreme left and right - there will be little room for compromise, only lots of argument. Such a scenario is destabilising for the economy, financial markets and property market. Following Greece's elections in May, only 40 per cent of voters supported Socialists, liberals and conservatives who occupy that middle ground and accept austerity measures as the price to pay for Greece remaining in the euro. The other 60 per cent mostly supported a collection of extremist left wing and right wing parties, including neo-Nazi Golden Dawn, who reject austerity measures.

Following the failure of talks over the past nine days to form a governing coalition another election will be held in June. Opinion polls suggest more Greeks will go to polar extremes at that election, with far left Syriza, already the second biggest party, topping the poll. What will happen then?

To answer that question, let's look at the two great historical examples of Polarised Pluralism: the Weimar Republic and post-war Italy. The Weimar Republic collapsed when the National Socialist German Workers Party was voted into power in 1933 and created a dictatorship under its leader Adolf Hitler. The rest, as they say, is history. Like Weimar, Greece is experiencing economic catastrophe, a full-blown depression – its economy has contracted by 20 per cent since 2008 and half of its young people are jobless. Weimar had hyper-inflation and mass unemployment. Germans papered their walls with banknotes, they were that worthless. In both cases, democrats could not navigate turbulent economic waters, and were unable to stop extremists entering the political process and dividing the nation.

Syriza is not looking to form a dictatorship, but if it is not willing to accept the terms of the EU and IMF bailout, then Greece will most likely be booted out of the eurozone and bailout funding will cease. This means the government will run out of money to pay public sector employees and Greeks with mortgages and other debts in euros will find them much harder to service in devalued drachmas. These and other economic strains caused by Greece's exit from the euro will lead to greater political instability. An outgoing Greek minister has warned of civil war. Another possibility is the return to military dictatorship - the military ran Greece until 1974. That's the worst case scenario. The Italian experience offers some hope.

Italy had elections almost every year for decades, invariably resulting in shaky coalition governments, sometimes consisting of five different parties or more. Following a series of corruption scandals involving leading established parties, two new blocs of left and right were formed in 2007, and this has created stability, though of a highly idiosyncratic, Italian kind – for example, the right-wing bloc, The People of Freedom, led by Silvio Berlusconi, consists of neo-fascists, Christian democrats, liberals and conservatives. Until 2011 it governed in alliance with Lombard separatists and, some say, the mafia. A UK equivalent would be an alliance of the BNP, SNP, Conservatives, Liberal Democrats, East End gangsters and Church of England. Berlusconi's failure to manage anything seriously except for his hair dye meant Italy went into deep recession and is now run by a government of technocrats. Nevertheless, it is stable.

Modern day Italy and Greece also benefit from something the Weimar Republic did not have: friends. The EU, IMF and European Central Bank, the troika, is attempting to prop up both countries. Greeks say the troika's medicine is killing the patient. However, not even Syriza wants to leave the eurozone, and with anti-austerity politicians sweeping to power in France and parts of Germany, it may be possible for a compromise to be made, to have the austerity pill  sweetened for Greeks by adding debt-free EU structural funds and European Investment Bank support to the bailout package. That's the best case scenario.

Unfortunately, even the best case scenario is unlikely to solve Greece's problems. Only a complete write-off of its debts, including bailout fund repayments, coupled with the structural reforms needed to make it competitive in the world would make it a good place for investment. There is too much opposition from Germany, the banks and others to having Greek debts written-off. While that remains the case, investment in Greece would be an investment in chaos, incompetence and much worse. In other words, avoid, avoid, avoid.

Tuesday 8 May 2012

FRENCH ELECTION: IMPACT ON PARIS HOUSING MARKET


Not much. Arab Spring and eurozone crisis more important


Contrary to conventional wisdom, the Socialist victory in France's presidential election last weekend will make little difference to the Parisian luxury housing market. This is reflected in the reaction of markets to that victory – as expected when a Socialist wins an election, financial markets fell the very next morning. But, within hours they rose again as brokers and investors accepted his policies would be little different to those promoted by the defeated presidential incumbent, the conservative, Nicolas Sarkosy. Although much has been made that president elect, Francois Hollande, wants to levy 75 per cent income tax on those earning euro1 million or more, the reality is that even if Sarkosy had won taxes would have been raised.

Nevertheless, the threat of higher taxes has already driven some wealthy French to buy homes in London where taxation is lower. Many of the 3000 French citizens who will be affected by the 75 per cent tax rate may leave. However, their departure will have less affect on the Paris luxury housing market than it might have done in the past, because domestic demand is less important than it used to be. According to Christies International Real Estate, two-thirds of luxury home buyers in Paris come from overseas.

What's more, whether French and overseas buyers continue to buy homes in Paris will have less to do with Socialist tax policy than powerful forces at work on the international stage. Principally these are the spiralling eurozone crisis and the political turmoil beyond Europe. These two currents, one pushing property prices up and the other, down, have been swirling round the city's housing market since early 2011.

First, fears that Greece will default on its debts and that this will spread like a highly infectious disease across the rest of the eurozone, with Spain, Portugal, Ireland, Italy and possibly Belgium defaulting too, have caused many people to think twice before buying a home in Paris, because French banks, who have lent heavily to these countries, could go bust and will need rescuing at huge cost to the French taxpayer (and those elsewhere). This has acted as a depressant on Paris property values.

Second, countering the eurozone debacle, has been a huge inflow of money from outside of France into the Paris property market, most of it coming from trouble spots. Overseas buyers include wealthy Middle Eastern individuals looking to escape violent excesses of the Arab Spring, rich Russians wanting to avoid excessive taxes and state bullying under President Putin, and Chinese wanting to leave behind corruption and autocratic government in Beijing. These international buyers have done much to drive up demand for large lateral apartments and trophy houses in the 6th, 7th, 8th and 16th arrondissments over the past 18 months.

Wealthy foreigners could be hit by higher taxes like the French. This may deter some of them from buying in Paris, but others will continue to do so, viewing higher taxes as a small price to pay for having their money protected in a safe haven. Many of these buyers fear they could lose all or most of their assets located in their home countries. In any case, higher taxes have been on the cards for some time, so overseas buyers have started to factor this into their calculations.

Also, although London and Monaco have lower taxes than Paris, the dirham, rouble and yuan stretch further in the French capital's housing market – prices are 50 per cent lower in the French capital than in its British rival. This is important to anyone wanting a spacious home, such as large Middle Eastern families. The highest prices in Paris touch euro3500 per square foot, compared to euro6500 per sq ft in London.

One other factor that will support prices within the iconic, nineteenth century city centre built by Baron Georges-Eugene Haussmann are strict planning controls – these allow few new developments to be built. In the long term, having the supply of property largely restricted to what is already there will help underpin values no matter what misfortune befalls the eurozone, what taxes are increased and what events take place elsewhere in the world.

Thursday 3 May 2012

PROPERTY HOTSPOTTER - MAY

Follow the agents who follow the money


Who opened or expanded branches in April

Cote d'Azur (multiple locations) – Knight Frank (PS: Christies International Real Estate extended its affiliate network there in March)


St Jean Cap Ferrat (Cote d'Azur) - Michael Zingraf


Villefranche sur mer (Cote d' Azur) - Nice Properties

Manhattan, Brooklyn, the Hamptons and Palm Beach, Florida – Hamptons International (marketing agreement with New York-based Corcoran)


Wandsworth and Battersea (London) - Hamptons International


Earls Court (London) – Marsh & Parsons



PROPERTY HOTSPOTTER is updated monthly. It lists which estate agents opened or expanded branches, or formed new affiliations, in the previous month.

Estate agents open or expand operations in an area when their research shows demand is rising, so this can indicate a future property hotspot.

See my Financial Times article on where and why agents expand by clicking on this link http://www.ft.com/cms/s/2/28b251d0-428d-11e1-93ea-00144feab49a.html#axzz1rARj2Xfz

If you want to add any branch openings/expansions to this list please add them to the comments section or tweet me @richardgwarren or email me at richard.warren@rocketmail.com

Thanks to buyers agent, Rebecca Russell, for some of the Cote d'Azur information. Her website: http://www.frenchentree.com/nice-property-finder/