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The tale of Ireland’s spectacular property boom and bust is well known. The Irish countryside is littered with half-finished properties – a legacy of the times when Irish banks would lend to seemingly anyone.
Little wonder that Irish prices have halved since 2007 and fallen further than in any other Western economy since the financial crisis. However, things may at last be starting to change.
The Economist claims that the ratio of prices to incomes and rents are both below their long-term averages and that house prices may be up to 5% undervalued in Ireland. Meanwhile, the Irish Independent reports that professional buyers are starting to circle the market.
So should you also be thinking of buying bombed-out Irish property?
You can't trust the government
There are rumours swirling of wealthy overseas investors circling the Irish market, drawn over in part by the promise of tax breaks. But cash-strapped governments can't really be trusted.
Torn between a desire to get their economies kick-started (which suggests tax breaks) and claw back debt (which involves hammering wealthy property owners), they can change the tax rules at any moment. Property owners – especially second property owners – make a tempting target.
Back in 2009, the Irish government introduced a new tax on non-principal private residences. Since then it has made concessions on capital gains tax (CGT) and stamp duty. Now it looks as though the capital gains tax rules will change again in 2013.
And it's not just the Irish government that is unpredictable. In December last year, Italy introduced new property taxes as did Greece. So tread carefully as a property investor – what looks like a bargain one minute may come back to bite you from a tax perspective the next.
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Irish fundamentals remain grim
In any case, a tax break is only part of the story. There are plenty of reasons to be pessimistic about the Irish economy. While Ireland has been praised for bouncing back from the worst of the financial crisis, GDP is still well below its 2007 peak. The Economist Intelligence Unit thinks that it may take over four years to get back to pre-crash levels. The latest GDP figures even suggest that it is starting to slip back into recession, with growth negative in the first three months of this year.
As long as Ireland remains in the euro, the government’s options are very limited. It can’t unilaterally cut interest rates or embark on money printing like, say, the British or American governments. Further, tax rises and/or spending cuts look likely. This is all bad news for Irish consumers. They may want to take advantage of cheaper housing prices, but against this backdrop, and with banks still reluctant to lend, most can’t.
There is also the question of the huge number of households at risk of losing their homes. Brokerage firm Davy thinks that as many as 16.5% of mortgages are in arrears – and this number may be rising. With unemployment at 14.8% many of these debtors have no hope of repaying their debts.
And thanks to various bank bail-out deals, the government effectively holds a lot of unsold and repossessed properties on its books. Its plan to get rid of them gradually may prevent any immediate price fall. However, the sales, which are not expected to finish by 2020, could keep prices suppressed for years.
Little wonder the ratings agency Moody’s thinks that prices could fall by a further 20%. While this may be a little extreme, we think that the risks to the downside make Irish property a poor investment for now.
But what about elsewhere?
Are there any other bargains in Europe?
As for the rest of the peripheral eurozone countries (Portugal, Ireland, Greece and Spain), they suffer from much of the same supply-side problems as Ireland, with huge levels of arrears.
There is also the question of property as an immobile asset. Many high-earners can avoid high taxes by getting on a plane and moving to a different country. Money and investments in bank accounts can also be moved across borders very quickly. However, as my colleague Merryn Somerset Webb points out, the same cannot be done for bricks and mortar. So while many investors may like the look of cheaper property, many will be put off by its relative illiquidity.
This also makes it an easy target for cash-strapped governments. Both Spain and Italy have increased property taxes in the past year. Cash strapped regions can also try to squeeze homeowners. This is a particular problem in Spain where local governments can set taxes on property values based on pre-crash prices rather than sale prices.
Go for European shares not property
In most markets right now, instead of buying European property, you should look at shares instead. The crisis has made several markets, especially those in Italy and Spain, good value. We recently recommended a number of ways to take advantage of cheap European markets here.
• This article is taken from the free investment email Money Morning.
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Matthew Partridge
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