As we
progress into the 21st Century, one theme that seems to a common one
among the so-called modern industrialized welfare states is a new
aggressiveness towards worldwide taxation of citizens. In the
case of the US, it has been the situation for some time now that the US
tax authorities claim the right to tax US Citizens on worldwide income
regardless of where they are living and working. They even go so
far to claim the right to continue taxing a citizen after that citizen
may have even renounced US citizenship (and procured another in the
process presumably). Death does not give you an escape, as the US
claims the right to tax the estate of US citizens as well.
Europeans on the other hand have it a bit easier in that they can
declare themselves legally non-resident in their former country (while
retaining citizenship) and opt out of the tax system accordingly.
This stems from the idea or concept that if you NOT living there, then
why should you continue to pay taxes for government services you are
not using? This at least is a fair and reasonable point of
view. However, with that said, we know that the European Union
certainly has a Savings Tax Directive designed to collect interest from
bank accounts across borders, that are owned by EU citizens. So,
even the EU is somewhat in this line of thinking, although certainly
not as much so as the US.
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In any event, many of these tax collection issues center around
investment or banking accounts owned by citizens in another
country. However, it is very interesting to note that REAL ESTATE
ownership is not reported, is not required to be reported and is a non
taxable asset for Americans or Europeans in terms of any worldwide
taxation reporting initiatives (unless you happen to have rental income
and are a US citizen, in which case Uncle Sam claims the right to pick
your pocket, which is another matter for another day). So, for
those people that very concerned about following the tax reporting
regulations to the word, owning an asset such as real estate in another
country may be the answer. In fact, apart from the idea of moving
funds offshore to buy real estate (which is perfectly legal to do and
does not invoke any sort of tax liability to do so), there are also a
number of social, economic and other benefits to consider as well.
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When you discuss the idea of owning real estate in another country with
Americans, many will claim that this is a risky idea, that legal
protections for titles do not exist, that living in foreign lands may
be dangerous, along with a whole slew of other comments - which are not
entirely accurate or true. In fact, in many countries, such as
the Dominican Republic, title insurance is certainly available (from
well known firms such as Stewart Title) and legal guarantees under the
law for foreign investors as well. In many countries also, you
need not be a resident or citizen at the time you make a real estate
purchase either.
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Europeans of course have no problem investing in real estate overseas
and generally make the leap to ownership abroad much quicker and
easier. Regardless, both Europeans and Americans do have a
current problem at home they need to consider in the decision making
process - namely a housing boom or bubble in their respective countries
(which means that NOW may be the best time to cash out and move your
profits).
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Calculations by The Economist suggest that house prices have hit record
levels in relation to incomes in America, Australia, Britain, France,
Ireland, the Netherlands, New Zealand and Spain. In other words, ratios
of prices to incomes are now above levels that have proved
unsustainable in the past. Taking the average ratio of house prices to
incomes in 1975-2000 as a baseline, American house prices are now
almost 30% overvalued.
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http://www.economist.com/finance/displayStory.cfm?story_id=3477796
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Where as housing prices have gone up roughly 65 percent in the United
Stated from the period 1997-2004 according to the Economist Financial
Magazine, the figures are far more dramatic in the following countries
for the same period: South Africa - 227 percent, Spain - 149
percent, Ireland - 187 percent, Britain - 139 percent, Australia - 112
percent (see the online article from the Economist for the full list).
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What does this all mean? Well, for starters it has been noted
that artificially cheap interest rates have been partly to blame.
Even more so in the US, where housing prices have not gone up as
dramatically as the other countries on the chart, YET the debt incurred
to purchase the properties could lead to a serious problem going
forward. In fact, in some areas of the US, it is estimated that
over 50 percent of new home financing is interest only and or hybrid
adjustable rate mortgages, whereby buyers are not even paying off the
debt principal as part of the payment plan (in the case of interest
only and so-called 1 percent ARM option loans). In addition, some
newer statistics would indicate that about 70 percent of all
residential real estate is mortgaged, in one form or another. In
other words, about 30 percent or so of US homeowners actually own their
own home outright with no debt or mortgage against the property, while
70 percent of US residential property has a debt liability. But
aside from that, home prices as a percentage of average income is at
one of its highest levels or ratios historically, making housing even
more expensive or less affordable for many middle class people.
European housing prices are even worse or have gone up even more
shockingly over the past five years, yet there may be a major
difference in terms of the consumer debt supporting it (in comparison
to the US market). However outrageous home prices are still
outrageous regardless, and a boom is also a bust waiting to
happen. One possible indicator that a boom is becoming overblown
is speculation. Roughly 20 percent (or more) of property
purchases in the US right now (2005) are done for speculative reasons
rather than personal shelter (personal shelter meaning you are buying a
home you intend to live in yourself).
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Your initial reaction to this might be - so what? But what if the
boom started to subside? What if US interest rates started going
up? What if many US consumers are in over their heads now (just
about making the payments) AND things turn negative? This may all
sound like a dooms day scenario, but keeping your fingers crossed does
not mean deflation or a turn down economically is impossible.
Germany already is starting to see a slight pull back in terms of
housing prices and the domestic housing market. Is it that Europe
follows the US in terms of economic cycles, is it the other way around
- or not at all? It can be difficult to predict, but one thing is
certain - real estate in many other countries is still less expensive
and not over leveraged with debt. Why is this so?
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Financing is available in most other countries, but it often doesn't
make any sense, said Elizabeth Makatura, vice president for
international service and operations for Coldwell Banker. Interest
rates can be as high as 30 to 50 percent in some parts of Latin America
or the Caribbean. Down payment requirements are also more
stringent. While it's not uncommon to put down as little as 0 percent
to 5 percent in the United States, in many other countries buyers need
a hefty amount of cash to qualify for a loan. According to Fannie
Mae, buyers in Italy may need to put down 50 percent of the cost of the
house. In Germany, a 40 percent down payment may be needed, and in
Mexico a 30 percent down payment is the standard.
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http://money.cnn.com/2004/11/11/real_estate/investment_prop/pf_worldhousing/
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Sounds terrible, does it not? But it is true in many countries
that local banks require a 50 percent down payment or will only offer a
mortgage for 15 or 10 years only. But is this really such a bad
idea? We know that according to some US statistics, roughly 70
percent do NOT own their own home. Which is to say, people that
have purchased homes think that they own it, but they really do
not. The bank does, and in effect these people are tenants making
monthly payments to the bank. Where as in the past, this was a
fairly sound idea - many people today are making interest only
payments. In effect, remaining on the hook for the full debt
amount while making monthly payments to the bank for interest
only. In any event, from a socio-economic point of view,
certainly a case of citizens living on credit (in terms of their own
home) and certainly very much so exposed financially should things
become difficult economically going forward. Contrast this now to
a country where most of the citizens own homes outright (paid in full
with no mortgage) or whereby the requirements are steep in that a loan
applicant must be very solvent in order to qualify. What are
possible differences in financial outcomes for people living in the
easy credit environment (no money down, etc.) versus the later more
difficult one? One thing that comes to my mind, in terms of the
easy credit environment, is that many people are going to loose their
homes and face severe problems (which often enough translate into
social problems). In the country where most people pay cash for
their homes, they may loose their job, the economy may turn negative -
but they still have their own home (free and clear). Ergo, even
with a poor economy, certainly the probability of LESS social strife
and not more, in the country with the high down payment or cash only
real estate purchase environment. Where have we seen real case
studies of this? Where have we seen a country where the people
actual do own their own property, and often have more real personal
wealth that have allowed them to weather economic torments?
Argentina is one and the Dominican Republic yet
another.
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This is in contrast to accepted wisdom in North America, whereby
everyone can borrow money and buy a home - but without the savings to
do it with. No money at risk often means no personal
responsibility, or at least the probability of walking away if things
go wrong (and certainly not a pretty site for the banks that have
loaned the money either).
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In any event, let us put our long-term rational thinking caps on for a
moment. If the US and Europe has experienced explosive
double-digit gains in the housing markets (a boom, if you will), is it
perhaps time for some profit taking? If you do believe that there
is a debt and leverage problem affiliated with the housing market in
these places as well, then where will this lead socially and
economically? The final question is, depending of course how you
answered the first two questions - Where do you go?
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The surprising answer for some might be - those very countries where
credit is strict and housing equity in the hands of the owners and not
the bankers. For many people, the equity in their current home is
the bulk of their wealth or savings. So, it stands to reason, the
opportunity exists to tap into that wealth and buy a home, apartment or
small farm in Argentina, Brazil, Dominican Republic, Ecuador and a host
of other places where the climate is good year round, real estate
prices are not overblown AND whereby perhaps the opportunity exists to
draw a tax-free income from the left over funds. So, we started
our discussion with the idea that buying real estate abroad may be one
of the few legal non-reportable wealth transfer opportunities left (for
Americans especially). However, the benefits extend far beyond
just that.
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SOME ADDITIONAL INFORMATION:
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Comments from Mr. Graham Hacche, Deputy Director of the External Relations Department at the IMF, September 29, 2004
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The United States, which led the way out of the recession, recently hit
a soft patch. With failing fiscal stimulus and higher oil prices
weighing on consumption, much will depend on continued employment
growth. Nevertheless, this is a soft patch, not a sinkhole. The
measured pace of withdrawal of monetary accommodation should continue.
On the fiscal side, however, despite recent revenue buoyancy, we see
red ink stretching into the future.
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Latin America is doing a lot that is right, and it has a period of
growth, and it should use the period of growth to strengthen some of
those reforms.
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http://www.imf.org/external/np/tr/2004/tr040929.htm
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OTHER RELATED REAL ESTATE ARTICLES:
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http://bigpicture.typepad.com/comments/2005/05/interest_only_l.html
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http://bigpicture.typepad.com/comments/2005/05/as_prices_rise_.html
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What to know more about a brand
new 1500 square foot apartment in the Caribbean for less than
US$60,000? How about a new 2200 plus square foot home for
about US$120,000? How about a 2 bedroom beachfront condo
complete with private beach club facilities in a resort area (that you
can rent out for income when you do not use it) for US$135,000?
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