For a decade or more, prior to 2008, investing in Algarve property looked like a sure-fire way of sitting back, enjoying a wonderful lifestyle and watching your property soar in value. Well, only four years on and it feels as if we are living in a different world, says Linda Kenny.
During 2011 falling demand drove prices lower and it is this which is still keeping prices down. There will be no significant improvement in the market until investor confidence returns in the home countries of the non-resident purchasers and a credible political plan for Europe and the Euro starts to show results.
To have any idea of what might happen to Algarve property prices in 2012 we need to take a look at the main areas of influence – the Portuguese economy, the UK economy, the Euro-zone economy and the banking industry.
The Portuguese Economy
During 2011 Portugal has been in the spotlight – mostly due to the need for an €78 billion bailout package from the European Union and the International Monetary Fund. To meet the terms of the bailout there are dramatic cuts in spending and increases in taxation.
The 2012 budget proposals are significantly more severe than the 2011 measures. The austerity measures are designed to help the government meet its planned budget deficit reductions and it continues to expect the economy to return to growth in 2013. But hey ho! They say that all publicity is good publicity – we shall see.
The UK Economy
The OECD (Organisation for Economic Co-operation and Development) predict that the weak economic recovery of 2011 will see improved growth in 2012. It concludes that the government’s public spending cuts strike the right balance and should continue even though unemployment is likely to increase in the short term and inflation will not meet it target until late 2012.
However there have been concerns about Britain’s economic recovery and the severe adverse effects the euro-zone debt crisis could cause. Hopefully the fear of the economic recovery being destabilized by euro-zone events has, at least in part, been allayed by the decisions taken in late October 2011 by Europe’s leaders to solve the regions huge debt crisis.
The Euro-zone economy
Following the realisation that Greece would not be able to pay back its debts – and therefore default - the potential risk of contagion through an unresolved euro-zone crisis appears to have diminished with the euro-zone debt agreement. This agreement requires banks holding Greek debt to accept a 50% loss, the bailout fund to be boosted to €1 trillion and a requirement that banks raise more capital. Subject to this agreement being implemented, we seem to be a step closer to Europe resolving its financial and economic crisis but with still some way to go.
The Banks
Currently Portuguese banks are highly exposed to the Portuguese economy through loans and at risk through their sovereign debt exposure while currently having no access to wholesale markets. To comply with the euro-zone debt agreement, they are likely to need €7.8 billion to boost their reserves.
While there is provision to cover this through the bailout fund, the government is anxious to ensure that creaking balance sheets are not strengthened at the cost of banks reducing credit available to companies and individuals. To their great
credit, some Portuguese banks continue to make funds available for mortgages and equity release and this will certainly continue in 2012.
So based on the above, are we able to make any predictions on how the Algarve property market might move in 2012? Leaving sentiment behind, it looks likely that austerity measures, bailouts and euro-zone debt agreements will come together to achieve some positive results which will be reflected in reduced budget deficit figures together with an increase in stock markets and investor confidence.
This in turn should translate into individuals regaining the confidence to make major decisions – including property purchase. While I believe that the increase in prospective purchasers will result in improvement in the property market towards the end of 2012, any return to pre-2008 levels is likely to be some years away.
To this end it will be the responsibility to agents to convince vendors to price properties realistically – while at the same time ensure that purchasers know huge discounts are no longer available on already ‘discounted’ properties Because of
continued uncertainty in job markets and high unemployment within many European countries, it seems likely that many prospective purchasers will be retirees or those looking for investment opportunities. Investors realise that property can
provide a safer and more productive investment than the stock market.
Rightly or wrongly, prospective purchasers will inevitably be influenced by any continued economic turmoil. In summary, the fate of the Algarve property market is largely in the hands of the decision makers in Europe and our own politicians in Portugal
Property investment is not suitable for everyone and we recommend that advice in sought before making any commitment. As an independent financial adviser, Blacktower seeks to endure that clients receive advice suitable for their circumstances. Please contact Linda Kenny F.C.A., International Mortgage Adviser, on 289 355 685 or 917 642 301.
Blacktower Group with offices in the United Kingdom, Gibraltar, Portugal, Spain & France. Blacktower Financial Management (International) Ltd is licensed in Gibraltar by the Financial Services Commission (FSC) License No. 00805B. Blacktower Financial Management Ltd is Authorised and Regulated in the UK by the Financial Services Authority.
This article first appeared in Algarve Golf & Property Magazine – www.algarvegolfandproperty.com