Mallorca & Spanish Property - Interest & Exchange Rates
Novi Property Mallorca
Property for sale in mallorca, chartered surveyors in mallorca, Mallorca property market
The international financial back drop for the Spanish and Mallorca property markets remained largely unchanged over the last month although the expected long term trends for exchange and interest rates appear to have been established despite ongoing uncertainty across the globe.
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Interest rates in the US and UK seem to be close to their bottom (not least because they are close to zero!) and expectations are that they will remain at these levels for some considerable time with any increases not anticipated until 2011. The emphasis in the US and UK will stay with quantitative easing measures to improve cash flow in the credit markets.
In the Euro Zone on the other hand interest rates remain relatively high at 1.25% and while the ECB talks of announcing measures to ease private sector credit, the reality is that these are much harder to introduce in a "multi state" Europe and where no procedures exist to indemnify the Central Bank against losses resulting from asset purchases. At least in part this should mean that the ECB will have to continue to reduce interest rates, despite their reticence to do so, in contrast to central banks elsewhere. The RBS only anticipate one further quarter point drop although at Novi Property we feel that the structural weaknesses in the Euro Zone, coupled with the more restrictive position of the ECB regarding quantitative easing methods, could mean one further quarter point cut may be needed.
On the exchange rate front, and particularly the relationship between Sterling and the Euro, the trend of a more stable Sterling, and a move to longer term weakening of the Euro, has continued. Much of the weakness of the UK economy, and on going downside risks, seem to have been factored in to the current Sterling rate, while that does not seem to be the case in Europe where the expectations are that the single currency will continue it's decline against the dollar and start to suffer against Sterling (the Euro lost 2% agaist Sterling last month).
As we have maintained for sometime this backdrop for prospective purchasers of Mallorca property is reasonably favourable although the big question for Sterling denominated buyers is how to time any acquisition to take advantage of the anticipated strengthening of Sterling / weakening of the Euro. While buyers may wish to look at delayed completions and multi currency mortgage finance, UK national vendors of Mallorca and Spanish property face a very different problem - how to achieve a sale as quickly as possible and in a very weak market, if they are looking to repatriate sales proceeds back to the UK and take advantage of Sterling's current weakness against the Euro.
Where a buyer is Sterling denominated and vendor a UK national seeking to repatriate funds it is vital that the dynamic of the negotiations includes a currency / exchange rate element, if a fair and equitable deal is to be found that can satisfy both parties and facilitate a deal.
By way of example: A property valued at 500,000€ would "cost" a Sterling denominated buyer 454,000 pounds at today's exchange rate of 1.10 Euros / Pounds. Assuming the purchase were delayed 9-12 months this "cost" may well have fallen to 400,000 pounds if the exchange rate has moved to 1.25 Euros / Pounds, as is forecast, ie 54,000 pounds / 12% less. Of course the opposite has happened to the hypothetical UK national vendor of the same property. Rather than receiving the 454,000 pounds he / she will only have 400,000 if the sale is delayed. It could thus be argued that if both parties want a deal then some middle ground should be found where perhaps the buyer agrees to pay now but pay a little less and the vendor accepts less in exchange for an early completion.
Equally in such a weak "buyers" market it could also be argued that with "buyers" so few on the ground a vendor might do better accepting a lower offer now, rather than holding out for something higher in the future, not only because of the uncertainty of whether another buyer will be found but also because if and when they do come forwards the exchange rate will have moved against the vendor. In our example the vendor might well be advised to accept an "offer" today of 440,000€ which when exchange and repatriated at an exchange rate of 1.1 Euros / Sterling will give him / her 400,000 pounds, rather than hold out for 500,000€ in the future which will not only, in all probability, be worth no more than the 400,000 pounds they would get now, but also has the very significant element of uncertainty given that the buyer may well not be there at all in the future ("bird in the hand"!!)
The "win / win" option is for the vendor to sell now at the prevailing high Euro / Sterling exchange rate but the buyer to delay having to exchange his / her Sterling to Euros which can be done, at least in part, via a multi currency mortgage (ie the mortgage is taken out in Sterling but later converted to Euros when the exchange rate is more favourable. Obviously there is still a need to pay a deposit in Euros, likely to be 40% in the current market with prevailing Loan to Value Ratios, so the buyer will still want a discount but only on 40% of the purchase price not 100%.
In our case the purchaser may want to reduce the Sterling equivalent of the 40% deposit on the 500,000€ purchase price from 200,000€ (ie 181,000 pounds at today's exchange rate of 1.1 to 160,000 pounds based on an exchange rate of 1.25 that they may have got delaying the purchase for 9 -12 months). The overall purchase price would thus be agreed at 21,000€ less (ie 479,000€) rather than 60,000€ less (ie 440,000€) in the example above. The buyer is left in the same position as before while the vendor is 39,000€ better off. Please contact David Novi BA MPhil MRICS if a multi currency mortgage might be of interest.
Continuing the "mortgage" theme, although these are not easy times for obtaining credit, if you do have a stable income profile, some excellent deals are now available for prospective purchasers with banks seeking to "entice" new good quality clients to help balance their lending portfolios against the ever increasing number of existing bad debts on these books, resultant in part due to their own imprudent lending practices. Again contact us for further details.
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