If the Euro Splits.......

[Lagos]

There are some very bright sparks on here and I was wondering if any of you have a view on this.....

I have a house in Portugal which I have basically financed from profits off here. I have a Mortgage on it in Euros at at very favourable spread on the Eurobor. My question is if Portugal were to exit the euro or start to use B euros or something similar what will happen to the value of my house and will I lose my good deal with the bank on the mortgage when they change the currency?

Any views appreciated.

Thanks

Martin

[Euler]

The only reason a country would leave the Euro would be so that their currency could free float, then possible devalue against the Euro and restore some competitiveness to the local economy.

If you hold a property in one country but a mortgage in another currency then a devaluation would see you holding a large debt against an asset that has shrunk in value, so not ideal.

I'm surprised the Euro area has such a short memory: -

http://en.wikipedia.org/wiki/Black_Wednesday

Not saying it's another Iceland, but I have been keeping an eye on the Icelandic economy since they imploded. That may prove a model for others: -

http://en.wikipedia.org/wiki/2008%E2%80 ... ial_crisis

[sweetybt]

Iceland was rather expenive last time I went there so perhaps it will make their beer and Aluminium a bit more affordable.

Where is your house Lagos?

or shoud I say where is your house? Lagos?

Hopefully Luxembourg will attach itself to Germany like a leech in any case of a split.

I would buy a house in Oz. Even if there cricket team is crap, their country is a logical economy based on digging things out of the ground and selling them to the rest of the world.

[rubysglory]

I would buy a house in Oz. Even if there cricket team is crap, their country is a logical economy based on digging things out of the ground and selling them to the rest of the world.

Here in Oz sweetybt. we are runninhg a two speed ecomomy - Mining and the rest.Those that mine are literally rolling in cash whislt the rest of the economy is struggling. The Retail Industry and Tourism Industry are taking a hiding as a result of the 30% appreciation of the $AUD in recent years, Health continues to struggle to meet demand with little or no upward revenue adjustments, residential home approval rates are at historic lows and asset values are flatlining. Nowhere near the problems seen in US and Europe, and for that we are all grateful, but " not all beer and skittles" either.

rg

[Iron]

Let's say I owned a house in Greece that's worth 100,000 euros. And let's say that Greece decides to return to the dracma.

I'm guessing the Greek authorities would say something along the lines of "We'll give the Greek people 1 drachma for every x euros they give us".

If that's what's happens, then surely the currency will be redefined rather than devalued, and, everything else being equal, you'd be able to exchange your house for money that buys the same bundle of goods and services as was the case before they scrapped the euro. If that is the case, then I'd expect to get as many pounds from the sale of my house as I did before the reintroduction of the euro.

But the key phrase there is 'everything else being equal'. I don't know what would happen if Greece left the Euro. They might cancel all their debt and gradually rebuild their economy. Or they could end up in economic turmoil, in which case I'd probably take a loss on my investment...

Jeff

The only reason a country would leave the Euro would be so that their currency could free float, then possible devalue against the Euro and restore some competitiveness to the local economy.

If you hold a property in one country but a mortgage in another currency then a devaluation would see you holding a large debt against an asset that has shrunk in value, so not ideal.

[Iron]

Another reason I wouldn't invest in a country where the euro could well be replaced by a local currency is because of political instability.

Take Greece. The people are sick of austerity measures and the economic situation, both of which are unlikely to improve anytime soon. And I imagine that many Greek people feel that Angela Merkel decided who their new PM was going to be, rather than the Greeks themselves. So there may come a point where the Greek people or the Greek army decide that enough is enough, and overthrow the government...

Jeff

[CaerMyrddin]

But the key phrase there is 'everything else being equal'. I don't know what would happen if Greece left the Euro. They might cancel all their debt and gradually rebuild their economy. Or they could end up in economic turmoil, in which case I'd probably take a loss on my investment...

Nothing would stay the same. In the first day the new currency was traded, everybody and someone else would be shorting it!

[Lagos]

Thanks to you all for your replies.

Sweet you are right but the 1.01 is long gone!

I really dont know what will happen and I dont think anyone else does either.
If the Euro goes we could all be toast for some time.

In my road there are 5 houses one is owned by a Dutchman one by and Irishman and the other three by Brits.If the Portuguese currency collapsed and the property prices with it, it would make these sort of houses good value for Northern Euopeans,In other words if they thought they were worth X in pounds now why wouldnt they think they were still worth that in Pounds after the de valuation in the local currency V the pound.So the value in the local currency would rise as the currency fell against the pound.

It would also reduce the running costs as you would get better value in portugal for your pounds.

The other senario would be for the ECB to save the Euro by printing Euros which would surely mean you could buy more Euros for your pound and hence makes the property in pounds more attractive.

Or am I just talking my position

[Euler]

The Euro or countries in it need to devalue so that's never a good scenario for asset holders in local currency. But the good thing about a hard asset like property is that you get a yield on it in the form or rent, therefore it's value will recover given time. Devaluation often brings inflation and that should help rebalance things eventually, especially if you are carrying debt.

[Iron]

If the Portuguese currency collapsed and the property prices with it, it would make these sort of houses good value for Northern Euopeans,In other words if they thought they were worth X in pounds now why wouldnt they think they were still worth that in Pounds after the de valuation in the local currency V the pound.

Possibly. But they might also think 'Do I really want to be investing in an economy that's in deep trouble, with the potential of widespread social unrest? If this currency weakens further, which it probably will, then I'll make a loss when I eventually sell the house and convert the money back to my country's currency.'

So the value in the local currency would rise as the currency fell against the pound.

Or the value in the local currency could tumble due to the country's economic woes, if we assume that the vast majority of the demand for domestic housing comes from the local people.

Contrary to the constant Daily Express headlines about soaring house prices, house prices generally don't do brilliantly in the middle of an economic downturn!

And if the banks aren't lending much, even to Northern Europeans (which seems quite likely, given the turmoil that would follow from a country leaving the Eurozone), then there aren't likely to be many buyers...

It would also reduce the running costs as you would get better value in portugal for your pounds.

...assuming there isn't hyperinflation due to Portugal printing money in a desperate attempt to keep its head above water. which could wipe out the advantage that brings...

The other senario would be for the ECB to save the Euro by printing Euros which would surely mean you could buy more Euros for your pound and hence makes the property in pounds more attractive.

The ECB probably will start printing euros soon, given that no-one will lend them the trillion or so euros they need to save Italy.

And whilst that would make the property more attractive to a UK buyer, there aren't that many people in the UK who are able to buy houses right now, due to the economic situation and the fact that the banks aren't lending...

Jeff

[Lagos]

Some more good replies

All very interesting stuff!!

Thanks again

[Iron]

No problem.

Just spotted this (posted this morning) on the Telegraph website:

'Portugal is still mired in recession. The country's economy contracted by 0.4pc in the last quarter and 1.7pc year-on-year. Portugal's economy has spent the whole of 2011 in negative territory.'

Jeff

Some more good replies

All very interesting stuff!!

Thanks again

[superfrank]

If you are not intending to sell the house then I think it unlikely you'll have a problem (for the next few years at least).

One of the main reasons for near zero interest rates is to prevent an implosion in property prices - the UK for example is still massively leveraged into property (individuals, developers and banks) and the BoE know that if interest rates were near 'normal' that there would be mass repossessions, prices would crash and the banks would be even more bankrupt (if it's possible to be more bankrupt!). Hence BoE policy to save the indebted at the expense of savers (moral hazard somehow got lost in all this mess).

The situation in Europe is a bit different in that it was mainly the periphery that had the extreme house price boom.

In the short-term central banks' loose monetary policy won't change - they'll keep rates low and keep printing. In real terms property values will slowly decline, but at a pace which doesn't kill the banks (that's the hope anyway).

Have prices in Portugal fallen like in Ireland?

Is it true that 40-year mortgages are now common for young people?

Edit: If Portugal leaves the Euro then I wouldn't want to be owning an (investment) asset there.

[CaerMyrddin]

Is it true that 40-year mortgages are now common for young people?

Yes, it is.

Have prices in Portugal fallen like in Ireland?

No, they haven't, but with the reducing income my guess is they will.

[superfrank]

Is it true that 40-year mortgages are now common for young people?

Yes, it is.

Poor sods. 40 years of debt for a slave box just so that the baby boomers can keep all their equity gains (that's my view on it anyway!).

Have prices in Portugal fallen like in Ireland?

No, they haven't, but with the reducing income my guess is they will.

In Spain the banks are sat on hundreds of thousands of properties (not marked to market) and are only selling them very slowly because they are scared of the impact on prices and thus their loans books. Maybe the same is true in Portugal.