Spanish Mortgages = Property Prices May be Down...but it's Not All Bad News!

Remember ‘Black Monday’ in October 1989? The stock market ‘crash’ was shortly after the ‘Great Storm’ when the southern part of England was ripped to shreds by the infamous hurricane that was never meant to be! Well, at least according to Michael Fish!

Well, the crash in the stock market on ‘Black Monday’ followed a heady rise over a number of years and, in particular, during the year in question. But, even after the massive correction in prices, the year still saw an overall 7% increase despite the peaks and troughs.

The point I wish to make is this! Wherever there is a buyer there has to be a seller. The sensible buyers then were big, big financial institutions who knew they were getting a good deal when smaller investors in the main went into panic! These institutions do not have ‘knee jerk’ reactions to prices; they always invest long term and will, if the conditions are right, take advantage on sudden downward movements to pick up what they would deem as cheap buys!

Now the same can be said in relation to the property markets both here and back home in the UK. Yes, we are seeing downward corrections in valuations, but they follow very strong rises over a sustained period of years.

Buyers that are in the market now, not for overnight ‘flips’ and hopefully short term gains but for the longer term, are looking at prices perhaps 10% less than not so long ago. In the stock market they would be buying more shares to ‘average down’ the cost of their holdings. So, where property is concerned, we all know that over time the prices will drive ahead again and, where the property has been acquired in a ‘trough’, the gain will be that much higher than if it is acquired when the price was chased up i.e. at a peak. Common sense I know, but it’s easy to forget the obvious.

Now combine this market phenomenon (reduced prices) with 2) mortgage interest rates at only 3% AND 3) the availability of ‘Interest Only’ mortgages, you have a great combination to acquire more property whilst controlling the debt service at really low levels.

So why would you want more property? Your current home will either rise or fall in value according to general demand for property or even specific demand for your property type. Apartments are in abundance here whilst larger, quality homes are not! The latter will see their values hold up as a consequence whilst property at the lower end of the scale will suffer from oversupply. The amount of mortgage you have your home is irrelevant for considering why you may want to double up. So what would you rather have; one property showing growth over a period of time or two? The free equity in property number one can be used to provide 100% funding for property number two subject, of course, to normal lending criteria such as affordability and income, etc.

In recent times, say in the last 5 years or so, property in Almeria has shown a growth rate effectively doubling it’s value. Each year has seen double digit % rises and it is only in 2005 that we have seen a general slow down. The same has been seen in the UK so hardly surprising then, with so many prospective buyers coming from the UK, that there had to be a bit of a negative impact on Spain.

But that valuation rise translates into an awful lot of free equity being locked into the average home here. You can sit back on that from a position of comfort if you wish, but it is not ‘working’ for you by doing so. To work it has to be released as I have previously mentioned. How else do you think that property portfolio owners have gained their wealth? Only by doing as described and by constantly ‘leveraging’ or borrowing against their assets do you get compounded growth. That is growth upon your growth.

And the risks in doing so? If you expect to buy and sell in a year or even 2, do not progress any further. This is a 5 year plan at the least, and preferably longer. Anyone who professes to understand the art of investing of any nature will tell you that, with time, comes mitigation of risk. Especially in property. And it is interesting to note that, over a long period of time, residential property returns fair well in comparison to more volatile products such as stocks. That being the case I know where I would prefer my money!

So, if you are feeling down about your property value, but understand that eventually the market will come back in your favour, perhaps you should be thinking of doubling up and cost averaging just like those big boys in the money markets? You don’t have to sell to free your equity; take a mortgage. If you have an eye to move to another property, why not consider releasing the equity on your existing home, rent it out (long term preferably) and then purchase the second one. If you have free equity now, you can purchase that second property with 100% mortgage funding! No need to dip into savings or cash in investments.

Go find that 2nd property!