Property Hunting

Despite all warnings, the real estate market is still quite tempting to some…Doug Casey recommends that if you must become involved, choose properties off the beaten path…after you’ve done you’re research, of course.

It was good to get back to Spain, where I spent considerable time in the mid-’80s, before it joined the EU in 1986. Subscribers my newsletter in those days will recall my urging them to take a look at the country, especially Andalusia’s Costa del Sol, running east from Gibraltar. The reasoning was that, since Spain was only a decade out of the Franco dictatorship that had isolated it for so many years, it was one of the least developed and cheapest places in Europe. That, and the fact that it has the continent’s best climate (Andalusia is further south than Sicily), would draw lots of northern Europeans looking for a place in the sun.

It was a good call. The price of coastal land has gone up close to tenfold; even condos are up three to five times. It’s no longer cheap, though, so I no longer recommend it as an investment. Even though the phones now work and you can get broadband Internet everywhere, I’m not even sure I can recommend it as a lifestyle choice, as crowded and expensive as it’s become. At the same time, in the mid-’80s, I drew readers’ attention to the fact that the Spanish stock market was showing an average yield of over 12%. No more. It’s just as pricey as all the other European bourses. I still harbor a predilection for places that are off most people’s radar screens.

With that in mind, I spent the best part of a week in Turkish Cyprus.

Property Prices in Turkish Cyprus: A History

Northern Cyprus purports to be an independent country, but only Turkey recognizes it. It was created in 1974 when the majority of Greek ethnic Cypriots started a virtual war against Turkish ethnic Cypriots and Turkey intervened militarily. Some people put this down to a genetic predisposition of Greeks and Turks to hate each other. This is, of course, complete nonsense.

Since the civil war, lots of Turkish Cypriots have emigrated to seek peace and opportunity elsewhere, while lots of mainland Turks have immigrated to take advantage of the island’s higher standard of living. Anyway, the best way to truly take over a piece of real estate (as the Chinese could tell you in Tibet, or the Muslims are discovering in Europe) is to ethnically overwhelm the locals.

Cyprus has always, since ancient times, been a Greek island, even though it lies just off the coast of Turkey, and pretty far from mainland Greece. Then again, few people seem to know that western Anatolia-modern-day Turkey-was Greek until the Ottomans conquered it in 1453 followed by, predictably, an influx of Turks

A rather brutal military junta (backed, as almost always seems to be the case, by the United States) took over in Greece from 1967 to 1974. As militaries are wont to do, the new leaders attempted to justify their existence by fomenting a war. In this case, a civil war in Cyprus with the intent of merging the country into Greece. In order to prevent what had the prospect of turning into a genocide on the scale of the unpleasantness they perpetrated against the Greeks in Anatolia after World War I, the Turks sent in their army, dividing the country into the northern (Turkish) third, and the southern (Greek) two-thirds.

Who was right, and who was wrong? As is almost always the case, the root of the problem is not "racial memory" or some such nonsense, but one group of people trying to find an excuse to assert political domination over another. One group does something nasty, which is a good excuse for the other group to respond, which is a good excuse for the other group to counter-respond. After a while, they both forget how it all started and fighting has become something of a tradition, much in the manner of the Hatfields and the McCoys in the United States. In the case of recent Cyprus history, the Greeks started it-at least if you discount the original Turkish invasion hundreds of years before. But the Turks use it as a continuing excuse to station 40,000 troops on the island.

Property Prices in Turkish Cyprus: Property Prices

So why am I bringing this to your attention now? Several reasons, most of them practical. I went to Cyprus because I’d been given to understand that property in the Turkish zone was selling for a discount of 80-90% of its equivalent in the Greek zone. And since the Turkish side of the island was generally much prettier, the real discount was even more dramatic. My information was correct-when I received it two years ago. Since things had been that way for a couple of decades, and since I was busy in other places doing other things, and since experience shows that few readers actually pursue exotic opportunities beyond discussion at a cocktail party, I thought I’d have plenty of time. But then the Turks started getting really serious about joining the EU, for which the reunion of Cyprus became a sine qua non, and the prices tripled overnight. That means they’re now about half what they are in the south.

I’m reasonably sure if I’d gone to Northern Cyprus when I first heard the story, I would have bought something; it’s hard to resist when the discounts are that big. And, with few exceptions, my interest in property lies solely outside the U.S. for the foreseeable future. Any American with any money and any sense wants most of that money outside the U.S. Of course that’s true, to a greater or lesser extent, of any citizen’s home country almost anywhere-but that’s another story.

So why was, and still is (although to a much lesser degree), Northern Cyprus so cheap? Part of it is simply that it comprises 37% of the island’s land area, but has only 18% of its people, and those people have an average income only a third of what it is in the south. The main reason for the low property prices, however, is politics.

It’s not the relatively recent history of violence, although that has probably resulted in around 10,000 deaths since the country became independent (after a lot of violence) from Britain in 1960; prices in the south are among the highest in the Mediterranean. If the specter of violence alone were an issue, then Beirut, which was practically destroyed during the 1975-90 civil war, wouldn’t be as expensive as it is today. It has only been a decade since the fighting ended-with no guarantee it won’t start again-and it is one of the most expensive places in the world.

The problem is uncertainty. Will Cyprus actually be reunited? Will the Turkish army go home? These things don’t bother me too much. I suspect things will work out, one way or another. You can now walk across the "Green Line" separating the two sectors with no problem (although the Turks insist on stamping your passport in and out). The dividing zone is decrepit, full of abandoned buildings, and overgrown with weeds, but the UN troops are no longer obvious. Once you’re into the Greek section of Nicosia, you’re in a city as vibrant, bustling, modern, and expensive as any in Europe. Go back to the Turkish side, and you’re in a bit of a time warp. But I like that.

The key uncertainty is over title to property. When the Greeks left the Turkish side of the island, their abandoned properties were largely confiscated, with many being distributed to incoming mainland Turks. Other properties were exchanged for those of Turks who left the Greek side. One has to be very careful to establish the chain of ownership.


Doug Casey
for The Daily Reckoning
February 22, 2005 — London, England

P.S. So, am I buying? Probably not. For one thing, the worldwide boom in real estate scares me. I really prefer to buy when prices are down, people are scared, and my friends think I’m crazy for even thinking about it. For another, although Northern Cyprus prices are still relatively cheap, they aren’t absolutely cheap at; say US$100,000 to $200,000 an acre for something you’d like to own. And, for another, property is tough to manage even if it’s in your hometown. If you’re going to own something this far away, you better either plan on getting a lot of use out of it, or getting a real bargain.

Doug Casey is right…the real estate boom is quite scary. And now, with everything that is going on with Fannie Mae, it’s about to get a lot scarier.

Doug Casey, Chairman of Casey Research, LLC is one of the world’s most respected authorities on investing in natural resource stocks and editor of the International Speculator, now in its 27th year.

We found what we believe was a typical ratio in today’s news. Our dimwits were found, as might be expected, on the editorial page of the International Herald Tribune. Today’s Einstein, by contrast, comes out of the pages of a private newsletter, Grant’s Interest Rate Observer.

Mr. Vernon W. Hill is a small town banker…and rarer than a banker with a heart, Mr. Hill has a brain.

"We feel the United States is in trouble, with major weaknesses and unpleasantness ahead," he says. "Whether inflation or deflation lies ahead, or some kind of both, we believe many borrowers will be unable to repay their loans as scheduled." None of the reasons Mr. Hill mentions will be new to Daily Reckoning readers: little savings, little investment in productive industry, (much of what is invested is sunk into short-lived software), and the illusion of wealth that accompanies rising house prices. With little real investment in new factories or new methods of production, few good-paying new jobs are created. In such an economy, a banker without a brain walks lightly and lends heavily. For the president of Monroe County Bank, on the other hand, you get the impression that every step towards a new loan is uphill. He lends almost reluctantly, wondering how borrowers will be able to repay.

These insights are not new to us, but neither are they profitable – either to Mr. Hill or us. While other bankers move more and more of their money into real estate loans, Mr. Hill is warily reducing his bank’s exposure – especially to residential property. Home mortgages were less than a third of commercial bank loans in 1980. Now they are nearly two thirds. Other bankers will lend to anyone who can sign his name, provided he is buying a house. Mr. Hill wants to know how the borrower will be able to pay back his loan if – heaven forbid – his house doesn’t go up in price by 20% this year.

These are not the sorts of practices that would make Mr. Hill’s establishment the "Bank of the Year" or get his photo on the cover of Business Week. Not in the year 2005. His is not the Bank of the Present. It may be the Bank of the Past. That it may also be the Bank of the Future is the guess that keeps us going.

The Monroe County Bank is not only out of step with most of today’s lending institutions, it seems to be marching in the opposite direction – back to the future. We have never met the man, nor never visited his office in Forsyth, Georgia. But were we to enter the bank we would expect to find a man behind an old-fashioned ledger on an oak desk…and a spittoon in the corner. If we were to ask for a loan, we would expect a disapproving look, followed by a polite, but severe inquiry into our personal finances. No, these are not the methods of the typical banker in the 18th year of Alan Greenspan’s reign.

Nor is Mr. Hill’s approach to the credit industry particularly profitable. He admits he would earn more money by doing what other bankers do. Most bankers borrow short and lend long. As long as long rates are higher than short rates – and he does his math right – he will make money. Mr. Hill’s approach, borrowing long and lending short, is a curiosity in the banking industry. It forgoes current profits, he believes, in favor of a more solid balance sheet. And when long rates rise, which they will do, sooner or later – both Mr. Hill and we here at the Daily Reckoning are sure of it — Mr. Hill will have the last laugh. Compared to most bankers, it will be far easier for him to collect his credits and pay his liabilities. (More on this below…)

More news, from our team at The Rude Awakening:


Eric Fry, reporting from Manhattan…

"’I only get one good idea per year,’ the voice on the other end of the phone began, ‘but I’ve got a decent one now…I think.’ It’s only February…this one must be hot."


Bill Bonner, with more views:

*** Stocks are buoyed up or thrown down as the market’s view of the firm’s value changes. Profit-making enterprises’ value depends on how much profit they make, a figure both subject to change and subject to speculation. But the value of a house changes little over time. Year after year, it is the same roof…the same walls…the same cozy warmth and convenience. The value an owner-occupied house gives cannot be amended, jiggled, bent, written down, cooked up or restated. No clever CFO can "smooth" its earnings. No malign promoter can hype up next year’s sales. It is what it appears to be and nothing more: home sweet home.

But with the complicity of the entire credit industry – except for one bank in Forsyth, Georgia — Americans have come to believe that the very same dull and lifeless bricks they know so well – along with the fading paint, the stained carpets, the leaking taps and cracking driveways — have a near-magical quality; they can make them rich. They believe that the house is an "investment," different from stocks only in that it is safer and more profitable. They know from their own, direct experience that the house itself is not a profit center, but a cost center. Each month, the place must be maintained. Money must be spent on it. They know also that – other than the aforementioned service the house renders to its occupants – there is no output. There is nothing that comes out the backdoor that can be sold. As a business, it is a losing proposition, and they know it. It produces nothing; no revenues are realized. No profits are earned.

And yet, the homeowner also believes that he can go to friendly lenders from time to time and "take out" cash – as if the place had been accumulating earnings. What he is taking out, he believes, is merely surplus equity. He figures he had $200,000 worth of house last year. This year, he has $250,000 worth of house. He can "take out" the $50,000 extra and spend it – just as if the house had earned $50,000 in profit – and still have his $200,000 worth of house.

He does not seem to ask himself where that $50,000 came from. He does not seem to find it at all extraordinary that an item he knows to be a cost center could also produce more in "profits" each year than he earns in income! Nor does he wonder how there could be so much untapped "value" locked up in his house, when he knows full well that he and his family use every room!

Mr. Vernon W. Hill considers this "wealth" an illusion, as we do. He believes it will lead to big problems among both borrowers and lenders. To avoid the big problems personally, Mr. Hill, like Warren Buffett, lives in the same house he bought nearly 40 years ago. Avoiding the big problem professions, Mr. Hill requires prospective borrowers to show him their finances without considering the house they live in. Whatever value there is in the lived-in house, he says, is "inactive." It doesn’t really earn any money for you; if you were to sell it, you’d just have to buy another one. And you can’t ship it to China to pay for your flat-screen TVs or to Japan to pay for your SUV

*** This morning, the markets opened up on the dollar as if it were the French cavalry. The greenback fell 1% against the euro and yen.

*** Here, a reader sets us straight:

(From the Daily Reckoning): "Do hybrid cars really reduce energy consumption? We do not know, but we doubt it. Batteries must be charged up. Where does that energy come from?"

"When picking apart a silly idea by some other columnist, you should at least know SOMETHING about what you’re talking about. I’ve seen this type of comment about hybrid cars before.

"The theory is simple, and there is no magical power source provided.

"To make an attempt to enlighten Bill, I will provide a simple easy to understand explanation.

"Hybrid vehicles of all current production types use batteries to store a small power buffer, which can be used to boost a smaller underpowered gas engine at low speeds and during acceleration. These batteries are charged by regenerative (electric motor) breaking. In stop and go traffic, this can provide a significant power saving, and reduces wear on the conventional breaks. Recovery is not 100% efficient of course, so you still need to charge the batteries using the gas engine.

"The reason this works out to be a more efficient system is because using a smaller engine, which provides enough power for cruising on the freeway, but not quite enough for getting on the freeway, they can tailor the engine’s power output to a smaller range of speeds…because of the tuning, it acts more like a generator than a car engine. By tuning the power band of the engine, they remove a lot of in-efficient operation. Some hybrids go so far as to use a Continuously Variable Transmission, which can vary the gear ratio to match the engine speed, reducing the need for a wide power-band even more.

"Do your research before spouting off like a random noob on the Internet."

The Daily Reckoning