Mention that you’ve spent half a million dollars on a waterfront shack near your hometown, however, and the same people will probably pat you on the back with congratulations. 

But which purchase is more risky—really? 

Home prices have risen dramatically in a number of developed countries and few economists think this pace can continue. After years of dramatic increases in value, the future looks flat at best in many markets. In the U.S. right now, especially, many canaries in the real estate coal mine don’t like what they smell. 

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.

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… 
The U.S. real estate market may not be in a national bubble, but many regions are perilously close. In an alarming number of markets, prices have doubled in the past five years. In simple economic terms, the only way U.S. real estate prices can continue to rise unchecked is if wages rise in tandem.

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.

Red Lights Flashing 
Anyone who lives in Western Europe or Australia, however, knows that a housing bubble is not a U.S. phenomenon. Especially in the most desirable areas, prices have skyrocketed. London, Paris, Sydney, and the coasts of southern Europe have seen several years of double-digit price appreciation. Even once-sleepy Ireland has also gotten in on the act, with prices rising far beyond what can be supported over the long term. 

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.

Finding the Next Hot Spot
Nobody has a crystal ball that can predict when or whether prices in London, San Francisco, or Sydney will tumble. If prices do fall, history has shown that buyers who can afford to ride out the dip for a decade or two in prime locations will do fine. After all, there are only so many great cities and there is a limited supply of prime waterfront locations. The real estate slump that hit New York City and Boston in the late 1980s seems like just a bad dream now. Over time, the best properties retain their value through the cycles. (For anyone forced to sell in the early 1990s, however, it was definitely a nightmare.)

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. 

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
Another aspect that lowers the risk factor for many international destinations is their incentive programs. Costa Rica’s boom was, in part, due to their luring of wealthy investors with ample capital in the 1980s. The lesson wasn’t lost on Panama. If you can document a minimum monthly pension of $500, you can retire in Panama at any age and enjoy their pensionada program. It includes import duty exemption, half-price entertainment, half-price real estate closings, and hefty discounts on a wide range of costs, from transportation to medical consultations. The economy is stable and the U.S. dollar is the official currency. 

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?

Risk-free Doesn’t Exist - Of course every country is not equal and plenty of destinations come with extra risks. In Venezuela, ruler Hugo Chavez has showed clear disdain for property rights. He is threatening to seize private factories that are sitting idle and it’s not a big leap to imagine him doing the same for foreign-owned housing. In less affluent sections of Brazil's cities, there is a thriving black market in falsified ownership documents although local real estate companies say this is only an issue in urban areas, not on the coast. In some countries in Asia, land or business ownership requires taking on a local partner, which doubles the risk.

As we saw in 2005, it’s also hard to avoid a risk of natural disaster. Mother Nature can strike anywhere, as we found out the hard way. The list of potential hazards can seem staggering: floods, earthquakes, tsunamis, hurricanes, tornadoes, volcano eruptions, and mudslides have all wiped out homes recently. As every corner of the globe becomes more populated, the tolls will only get worse. It is hard to find an area where no threat exists, including the American heartland: a recent article in Wired magazine noted that there is a 90 percent chance that a magnitude 6 or 7 earthquake will hit eastern Missouri in the next 50 years. Keep in mind, however, that losing a $100,000 waterfront home in Nicaragua is certainly preferable to losing a $3 million home in Florida. 

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.