The property factor and the effects on tourism

Financial analysts are worried about the property sector and how a collapse here could trigger a mudslide affecting the economies of many European countries.

Take Ireland for instance which showed the greatest increase in house prices in the E.U. since 1995. Domestic property prices fell in April, the first decrease in five years.

In France, housing starts have declined for the first time in six years and in Spain where unfettered development over the years is being challenged by a crash in the value of shares in developers and builders.

The European Central bank, preoccupied with Germany’s depressed economy reduced interest rates overall to 2%, far too low for the bubbling economies of France and Ireland. As a result, their property prices soared. Bank interest has since risen in seven rapid steps to 3.75% and expected to reach 4.25% soon. This has meant a doubling of mortgage payments with its inevitable consequences.

In Britain, the Chancellor has been more aware of the impact of low interest rates on inflation, and here a wholesale crash is unlikely. A number of factors will affect house prices in the next twelve months. One is the dampening effect of stamp duty. According to the Centre of Economic and Business Research, stamp duty will generate £7 billion for the Exchequer in this fiscal year. This has affected sales and currently only 7% of the housing stock is in transaction compared to 9% in the 1980s. Demand is been generated also by overseas buyers from Russia and India who see London as a particularly desirable place to live. In other areas it’s the “buy to let” market sector that has restricted house availability.

The new Prime Minister, Mr Gordon Brown, recognises the shortage in supply and promises to build 200,000 new “affordable” homes each year, but some of the land available is flood plains and the hazards they pose have been evident in recent days.

Britain will therefore avert an all out property crash but by 2008, prices will stagnate. The British and more seriously affected citizens of Ireland, France, Spain and Poland will feel less rich and that should affect their spending on other things such as retail goods and possibly travel. Home improvement may do well, because house owners who postpone a move to more expensive properties may choose to invest in their current homes with conservatories and the like.

However for countries that depend on tourism one way of boosting visitors is to make it easier for them to buy a home in your country. They will then visit more often, stay longer, spend more and encourage friends and relations to come too. Some enterprising owners will let their property to other people from their own country. All this will raise tourist numbers.

Since 1998, British visitors to Portugal have risen by 48%. Spain has enjoyed the same level of success, whilst trips to Italy have grown by 66%.

Much of this happened because of more cheaper flights by bargain airlines, an older and affluent UK population and a feeling of greater wealth caused by rapidly rising UK property prices. Your house is worth more, so you feel wealthier, save less and even borrow against your growing house assets.

Apparently more than 300,000 properties abroad are owned by the British. Political stability, warm climate, lots of inexpensive flights to convenient airports and affordable property have made Southern Europe so popular.

Judging by the advertisements on television and in the press, countries like Bulgaria, Egypt’s Red Sea Riviera and Dubai are also seeking the British house buyer.

However property abroad will have to grow in value and generate income from lets to offset initial purchase prices. With so many countries jumping the bandwagon there is an oversupply of such homes.

Selling houses to foreigners may help boost tourist numbers, but the basic laws of economics still apply.

Demand must match supply or there will be tears at suppertime.