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On the legal front, the U.S. Supreme Court ruled, in Kelo v. New London, that local governments have the right to seize private property by eminent domain simply to increase the tax base through redevelopment. This precedent grants unlimited power to state and local governments, with little protection for property owners. Some states have moved quickly to enforce eminent domain laws, while others have yet to clarify the law. The status will stay muddy for some time. Meanwhile, in Hawaii, many developers and homeowners are wondering what the future holds for their investments. In 2003 all construction was halted on a 1,550-acre development that was to host 730 homes. A court ruled that the since the land was zoned as agricultural, building could not go forward. The problem is, dozens of other developments and golf courses are already built on land zoned as agricultural. Over 150 lot owners at the new development are still in legal limbo and a local planning commissioner has estimated that over 1,500 homes on the big island could be affected by the eventual outcome. And Then
There’s the “B” Word…
According to the Federal Deposit Insurance Corporation, home prices are growing nearly 19 percent faster than wages in Hawaii, nearly 20 percent faster in California, and 25 percent faster in Nevada. But the problem is not limited to the hot spots: in 38 of the 50 states, home prices grew at least 6.7 percent faster than wages over a 12-month period. A report released
in late 2005 by the PMI Mortgage Insurance Company found that five U.S.
markets have a 50 percent or better chance of seeing declining home values
over the next two years. Overall, the national risk was 22 percent that
prices will drop. The most overvalued markets were some of the biggest:
most of California, southern Florida, New York City, Los Angeles, and Boston.
Monthly Escrow Bills Increase One aspect of rising home values hasn’t gotten much press: rising property tax and insurance rates. For homeowners with or without a mortgage, these two items are expenses that always rise. Lately they are rising at dramatic rates, again pushing some homeowners into a danger zone in terms of what they can afford. In cities across the developed world, annual property tax bills are being hiked up 25 percent or more at a time as assessed values rise. The rise in value also jacks up insurance rates for homeowners and investors since the value of the home increases. It gets worse, however. Commodity prices have risen dramatically around the world, so everything from insulation to lumber is more expensive than just two or three years ago. As a result, insurance companies must raise their “replacement value” estimates. If that isn’t bad enough, the rash of hurricanes hitting the United States this year will undoubtedly lead to a rise in insurance rates for any home situated near a hurricane zone or flood zone—and that’s a lot of area! Red Lights
Flashing
Thomas Helbling, an economist at the International Monetary Fund, released a paper based on housing price cycles in 14 industrialized countries over a 32-year period. Using Helbling’s historical standard, the New York Times recently noted that housing markets in France, Spain and New Zealand have already boomed: inflation-adjusted prices have increased 19 percent or more over the past two years. Prices in the Scandinavian countries, Italy, Ireland and the United States are nearing that level. In Britain and Australia, prices look to have already peaked, with the jury still out on what will happen next. In southern Spain, many foreign investors are taking a bath, either through outright fraud or oversaturation from a building boom. A report in the British newspaper the Daily Telegraph sounded an alarm about the Costa del Sol region. “So many new developments have been built and sold to off-plan speculators that the profits are no longer there. A lot of speculators are now desperate to offload unwanted properties.” Finding
the Next Hot Spot
A safer bet, however, is in an area that has yet to be discovered by the masses, an area where the potential value has yet to be unlocked. The price of entry is a fraction of more developed locales. The risk of a decline in values is low since you are buying while the incline still has many years or even decades of sustained growth ahead. Imagine buying coastal Florida land in the 1940s or Caribbean land in the 1950s. How rich are the people who bought California houses in the 1960s or built their paradise in Costa Rica in the 1980s? For nearly any period over the past 50 years, there were opportunities in emerging areas that now seem so obvious as to be a smack on the side of the head. Only last decade, don’t forget, unbelievable bargains were still easy to find in Roatan (Honduras), in rural Ireland and Italy, and in much of Mexico. Now those areas are splashed across nearly every magazine article about buying abroad—long after the original investors have seen values quadruple. Very few spots in the U.S. can be considered a bargain anymore unless you are moving from a bubble market to the heartland—say Boca Raton to Birmingham, or Los Angeles to Louisville. In many coastal markets, prices have shot up 30 percent or more in one year. In popular vacation areas, full-fledged bidding wars are the norm. A 2005 article in Kiplinger’s Personal Finance noted that the median price of a vacation home in the U.S. was now $190,000 and that an acre of wooded land with lakefront in Minnesota was going for $250,000. Internationally, it’s a different story if you know where to look. On the Gulf Coast of Mexico, where I have a home in the Yucatan, you can still find a cottage a few houses from the beach for under $50,000 or huge beachfront home with a pool for under $150,000. Yet the area is 40 minutes from an international airport and a city of a million people. More than a few readers of this newsletter have bought homes in the mountains of Ecuador and spacious condos on the beaches of Thailand at similar levels. It is still possible to get a half-acre of land for less than $10,000 in locations throughout Latin America and Eastern Europe. For those who
want to live in a thriving city, without paying New York or London prices,
there are also plenty of options. Find a stunning apartment in Buenos Aires
(Argentina), Budapest (Hungary), Montevideo (Uruguay), or Ljubljana (Slovenia),
with lots of culture in every direction. Or look beyond the obvious within
well-known countries, such as Mexico or France, to secondary cities where
prices have risen more slowly.
Lower Land and Construction Costs By getting in on the ground floor of an undiscovered area, buyers can benefit from bargain-priced land, even in prime locations. In the “eternal spring” area of Boquete in Panama, plenty of lots are available at less than $8,000 per acre. Europeans are busy buying up land in Romania, Hungary, and Bulgaria, but you can still easily find a building lot for one-fourth the price of Western Europe. The other benefit of buying in developing countries is that construction costs are far lower than in the U.S. or Europe. In Mexico, $20 to $25 per square foot will cover the basics, including custom tile work. Spend a little more and you can get top-grade finishes. Installing an in-ground pool can cost as little as $8,000. In Roatan, $35 to $40 per square foot is common and in Panama expect to pay $40 to $50. In the U.S., Canada, Europe, or Australia, expect to pay several times this amount. If you want something finished, there is no shortage of options for a fraction of the price of home. There are plenty of nice condominiums available in Buenos Aires for under $50,000, or three-bedroom houses in smaller towns in Argentina for the same price or less. Throughout Ecuador, prices are similarly cheap, with houses on the beach going for as little as $60,000. You can still find an apartment in Budapest, Hungary for under $75,000. Browsing through real estate ads online will turn up plenty in this price range: chalets in Eastern Europe, beach condos in Thailand, or apartments in Turkey. Practically
Paying You to Invest
Nicaragua is following a similar path. Anyone 45 years of age or older, with a guaranteed monthly income of at least $400, pays no income tax on out-of-country earnings and household goods (including a car) can be imported duty-free. Supplies brought in to start up a business can also qualify. These incentive programs aren’t limited to Latin America, however. On the European island of Malta, there are no property taxes. Malaysia’s “My Second Home” program provides plenty of reasons to move there for retirement. Married couples with one partner aged 50 or older who meet asset or income requirements get an unlimited five-year visa initially and then permanent residency after that. Out-of-country income is tax-exempt, as are imported household goods and a car. Foreign residents can purchase one or two properties and are eligible for a mortgage for 60 percent of value. A growing number of countries don’t tax income from capital gains, so if you sell a vacation or retirement home at a profit, you could keep it all. There is fine print to pore over, but this currently applies to the rising markets of Argentina, Croatia, Poland, Portugal, and Thailand. Once you move
to a country like this, of course, your costs drop dramatically. Dan Prescher
and Susan Haskins, who run the Mexico office of International Living, estimate
that a couple could live comfortably in a popular expatriate area of Mexico
for under $14,000 per year, including medical care and a part-time maid,
and gardener. In plenty of other countries, it would be even less. What
would you pay per year to live in a vacation home in the U.S. or Europe,
at today’s prices?
No matter where you buy, find good local contacts and follow the usual common sense rules. Make sure the title is clear. Don’t invest your whole life savings in one property. Spend enough time there to be sure you like the place. Buy something you’ll enjoy even if it doesn’t appreciate much. Remember that
no investment with the potential of high returns is without risk, or without
its ups and downs along the way. But if you invest at the beginning of
the cycle, rather than one that could be nearing a downturn, it’ll be a
much more enjoyable ride.
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