Financial Perspectives

This recession is turning into a much longer and deeper one than anyone expected which is becoming more visible to a wider range of people as time goes on.

Individual house sales are a fairly rare event for most people so we’re still seeing people putting houses on the market at prices based on a purchase price from a few years ago which, in many cases, was a higher price than the current market will support. That houses won’t sell at these prices is obvious but in many cases the owners simply can’t afford to sell them at the current prices so they add to the collection of “for sale” signs which in turn make things seem a little bit worse as their numbers build. As an example of how far away from the current prices these can be take the example of a house a few hundred yards from me which was bought at the peak of the market at around £300,000 whereas identical houses are now selling (slowly) for around £170,000. Had those people bought on an 80% mortgage they’d need house prices to rise another 40% from their current level just to cover the mortgage.

However, even when houses are priced at an appropriate level that still doesn’t mean that they’ll sell quickly as once a buyer is found and the house is taken off the market it’s quite likely to get the “for sale” sign back as buyers frequently can’t get mortgages: in one local case it took three buyers before reaching one who could get a mortgage.

Sadly all this means that people will be stuck in their houses potentially for decades if they can’t simply write off what could be a substantial loss.

Although not too many people are doing it at the moment, this is probably one of the best times to consider buying an overseas property as prices are generally rather more depressed than they normally would be. Having said that there are lots more people selling or at least trying to these days which in itself brings up similar issues.

For a start there’s the different legal system to consider. Even if you’re European and buying or selling in another European country you can still find that, although illegal, the local authorities will retain some of the proceeds of a sale in case it turns out that you owe them any taxes. It’s worth pointing out to the legal person dealing with your sale that they are legally required to treat you as though you were a national of the country and that applied even if you fully intend to take the proceeds abroad afterwards so long as it’s to another European country.

Obviously with a property investment you can be talking in terms of quite substantial amounts of money and if you’re going to be changing currencies then it’s worthwhile looking into your options to reduce the costs of exchanging the money to the other currency and also of reducing the risk to you of there being a substantial move in the exchange rate. For example, this year the pound/euro rate has moved from around 1.10 to around 1.20. Ten cents doesn’t sound like much but if you’re looking at a typical property of around the EUR 300,000 mark that’s EUR 30,000 of a difference which is enough to cover legal fees with change or think of it as the swimming pool that you quite fancied.

How do you reduce these charges and risk? If you go to your bank as most people do you are likely to be hit with the maximum charge possible although the charge can be even higher if you just use the local legal people to send you the proceeds as they’ll add charges on top of that. The best way is to go to one of the specialist money brokers who can shave 5% or more off the charges that the banks apply and can also arrange to fix the rate you’ll get months in advance which eliminates the uncertainty in the amount that you will ultimately receive. Aside from the charges from the rate fix, there are no downsides as if the exchange rate moves in your favour you can let the fix lapse and exchange the money at the current rate.

On non-financial matters don’t neglect the time delays inherent in overseas moves generally. Not only does the money take longer to arrive (unless you just take it as a suitcase full of cash which is quite legal though may raise a few eyebrows), but it’s obviously going to take longer for the removal truck to move your stuff from A to B. There aren’t any formalities required in moving your own stuff around Europe although expect checks for illegal immigrants at the ports and be sure that the lorry doors are secured with a padlock (most aren’t) to avoid a few questions along the lines of the “have you packed the case yourself” familiar to air travellers.

It’s best to plan the move more carefully than you would for a normal domestic move as you’ll appreciate from the above that there are a lot more places that complications can arise.

Strangely enough, it might not be where you think.

Typically most people will move their money into cash savings in times like these and put those cash savings in a local savings institution on the basis that they know and trust the people in the branch. However, that’s a fatal error to make. Sure, you can trust the people in your local bank or building society branch with your cash but the problem is that they aren’t the people who’ll be investing that cash.

That’s how come Northern Rock created such a stir last year: it was very much trusted locally and indeed was well thought of generally too for that matter. However, what felled it was the way in which the financial wizards at HQ invested the money and pulled in more money to fund mortgages.

In fact, the safest place at the moment is one that’s commonly overlooked. It’s National Savings in the UK. That’s part of HM Treasury and it’s the one UK financial instution that can’t go bankrupt because they’re the people that create the money in the first place. No, interest rates with them aren’t as high as with other places but then interest rates aren’t that great at the moment anywhere and these days it’s safety that you should be looking towards.