The Rules Of The Game

No matter how many times I write about or say at a conference that government rules can change quickly in this world, many readers and conference attendees don’t file that concept away in their heads.

Last year, when the government of Northern Cyprus announced they were increasing the transfer tax for property (among other things including enforcing the rule that foreigners can only own one property), a reader wrote in to yell at me.

They were appalled that a government could change the rules on them and insisted the increase made their investment a loss… and it was all my fault.

First of all, getting mad at me because a government rule changed is, if you didn’t already realize it, absurd. I have no control over any government in the world despite what some people think. Also, I’m not omniscient and can’t predict when a government is going to change their rules.

Secondly, considering their property had appreciated by as much as 100% and still wasn’t even finished being built, the increase from 6% to 12% for the transfer tax, while steep, didn’t make their investment unprofitable.

Finally, they bought when the pound was around $1.18. When the change was announced the pound was around $1.26. Today, the pound is about $1.22. Using today’s exchange rate, they’ve made more than 3% on their original pounds invested.

They could have looked at the currency gain and the transfer tax change as a wash (6% transfer tax increase compared to a 3% currency gain times two thanks to the appreciation). Instead, they took the time to write to me to complain… about me.

Meanwhile, in the Spanish news, the government is contemplating a change in the transfer tax for residential property from the current range of 10% to 12% to 100% of the purchase price.

That level of increased transfer tax would definitely throw a spanner in an investment property… especially if the change passes and the government doesn’t grandfather in people who signed purchase contracts before the change… like those buying pre-construction property. That would be something to get upset about… but still don’t get mad at me.

Most people don’t think Spain will pass a law making the change. In reality, it’s a knee-jerk reaction to the general sentiment in Spain blaming foreigners for their ‘unaffordable’ housing and living costs. Tourists took the brunt of protests over the summer. Now the foreign investor is being targeted.

The truth is, however, that the total foreign (in this case referring to non-EU citizens) real estate buyers in Spain in 2023 was less than 5% of total transactions.

Maybe in some specific markets, the percentages were really high… high enough to affect the market, but generally speaking, foreigners aren’t the problem for the affordable housing issues in Spain. The main culprits, like most places, are restrictions on construction—zoning, planning, environmental—and construction costs.

One developer I work with recently said he can’t compete with old inventory in a market where he’s really the only new construction.

The old inventory was built years ago when construction was much cheaper. Demand is up in the area, but hasn’t pushed prices above new construction cost. Still, he’s pushing ahead and projects to make a profit on the project overall although he’s barely at breakeven with the first round of units.

Replacement cost for construction is going to hit hard the families who lost houses in the California fires this month unless their insurance policies specifically had a replacement cost clause. Maybe they do in California like they do in Illinois.

When I took over managing my mother’s bills a few years ago, I was appalled to see her house insurance policy insured her house for double what the sales value was. I called the insurance company to fix the problem. They informed me that Illinois has a law that if a house is destroyed… you know, tornado, fire, meteor… the house had to be rebuilt. The owner couldn’t just take the insurance money and run.

My mom’s house is more than 100 years old. Definitely construction costs were less at that time. And the rules… for construction and insurance have changed like most things do over time. Don’t blame me.

Stay diversified,

Lief Simon

Editor, Offshore Living Letter