InternationalLiving.com

Who's Driving the Market?

U.S. real estate markets are in crisis mode, and one big question on everyone's mind as a result is: Will the rest of the world follow suit?

My response: Yes…and no.

Many of the economic factors so negatively affecting the U.S. housing market right now don't exist in much of the rest of the world. While you can get high loan-to-value mortgages in some countries--and you can even get no-proof-of-income loans in a few--most banks in most countries maintain higher credit standards than have U.S. banks for the past many years.

Furthermore, the rest of the world isn't compelled to pull itself ever-farther up the housing ladder. In the States, people buy starter homes…which they intend to sell just as soon as possible for something bigger. And so on. In many countries, people aren't concerned about owning at all. They're content to rent. And, if they do buy, they buy once. They wait until they can afford the house they expect to live in the rest of their lives. The idea of buying, selling, buying, and selling your way to a McMansion leaves them shaking their heads in dismay.

Much of this is cultural. But other, more practical factors play a part, too. Specifically, the big transfer taxes, fees, and stamp duties imposed in many countries (which, in some cases, can amount to 10% of the purchase price or more) help to keep people from playing the climb-the-ladder game.

All of this creates generally more stable real estate markets, especially in Continental Europe.

Back to the original question…and to get to the point: Housing markets in countries that have been offering easy and high loan-to-value mortgages are going to fall, maybe hard, just like the U.S. housing market is falling.

Countries, though, that have been more prudent in their lending practices needn't necessarily follow suit…and I don't think they will.

The U.S. economy has been the world's leader for more than a half-century. Everyone can't help but wonder, now that it's taken ill, how contagious the sickness. Certainly, some markets will catch what the U.S. has got. But I don't think the epidemic or its symptoms will be as bad as many fear.

Indeed, foreign markets driven by U.S. speculators have already been hit. Some of these markets I'm invested in myself, so I've watched with interest. My conclusion? They continue to push ahead. The investor/speculator buyers may be thin on the ground…but the vacation-home and second-home buyers have continued in force. They're coming not only from the States, but elsewhere, as well. And this now becomes an important factor to consider when evaluating a property investment opportunity. Where are the buyers coming from? Is there a local market (as in Panama, for example, which I believe, as a result, is better immunized against what's going on in the States than, say, Nicaragua…at least outside the frenzied pre-construction Panama City market)? And is there a non-local market beyond Americans (as there is in Argentina and Uruguay, both of which are of interest to European and Latino buyers…maybe more so than they've ever been of interest to American shoppers).

Investor buying in U.S. property markets was down in 2006. However, the percentage of housing sales in the U.S. attributed to vacation homes last year increased. This makes sense. Vacation-home buyers are typically thinking longer term. They're not looking to flip, as a speculator would be, in a matter of a few years. They're buying, generally, something to enjoy through retirement.

All this is to say that foreign real estate markets and buyers are changing. They are not, however, disappearing.

The key is to think long term.

Taking this perspective, you'll notice (as I am noticing) that many countries make good sense right now for a vacation home buy. Places where there isn't a local housing crisis, as there is in the U.S. Places where the U.S. market doesn't drive the local market. Places where there is the possibility, say, of renting out your house or apartment when you aren't using it.

Two places in particular that come to mind may seem unlikely recommendations right now: Paris and Croatia. Even with the euro at an all-time high, these (and other) European destinations can make sense…especially if you can qualify for a local mortgage and are able to earn short-term rental income in euro, as you would be in both Paris and Croatia, for example. (The European can give you further updates on these areas)

Other spots to think about include Morocco, where prices are low and foreign mortgages are available; Romania, where ski properties are particularly appealing and inexpensive; and northeast Brazil, which boasts the world's most prized commodity--inexpensive beachfront.

Why these markets? Because they're not driven by U.S. buyers. And, right now, that's a big deal.

Regards,
Lief Simon
For International Living