Buying a property as an expat in Europe – the pros and cons
“Should I buy a property when I am living as an expat in Europe?” This is a question we are frequently asked at Black Swan Capital by expats living in Europe. In this article we will cover some of the pros and cons. Of course, the best course of action is specific to you and to your circumstances.
In many countries in Europe, if you decide you are going to stay there for some time, it might be a good idea to buy a property rather than rent. It can give you and your family some stability and if your mortgage payments are about the same as what you are paying in rent, it might feel like it makes sense to be paying off your home rather than somebody else’s. But it is not without risks, so you do need to consider the upside potential and the risks.
The reasons for
The current low interest rate environment makes it quite attractive. With the interest rates on mortgages often under 2% per annum at time of writing, the cost of borrowing is relatively and historically cheap. For these reasons, many expats have taken the plunge and own a house in their current home city in Europe. There is a real upside potential to grow your wealth, if your home increases in value, and by leveraging in with a mortgage, this is magnified. Traditionally, by borrowing to buy a home, for a small personal outlay you obtain a large investment. And even though you are effectively using someone else’s money, if the value increases, you keep all that upside. Of course, you only realise that upside when you sell, but if you sell if for more than you bought it, the profit is yours to keep. In addition, in many countries in Europe, if that property is your primary place of residence- your home- there might not be taxes to pay.
So, low interest rates, cash flow the same as renting, upside profit potential, no or low taxes on profit, it seems like a no-brainer.
It is not without its risks though. It is not a guaranteed way to make money; there can be complications and risks.
The reasons against
The adage “safe as houses” can be misleading, because property prices can go down as well as up.
There is a risk that a property can reduce in value over time; we have seen examples of this in Europe as recently as the last 5 years. The most recent UBS Bank Global Property Bubble Index, which measures the strength of property markets around the world, captures those cities where they think the market is most at risk of a spike and collapse in property prices. You can find the report here.
For our client in The Netherlands, Amsterdam was ranked 7th in the world last year, and number 3 the year prior, that is the third highest risk, in their opinion of a property market bubble bursting. If you are an expat that may be looking at a property purchase with the expectation of selling in less than around 7-10 years, this can be a real risk.
A problem with selling your property for less than you bought it for is magnified if you have a large mortgage for most, or all, of the value you paid for it. For example, in The Netherlands, where it is possible to borrow 100% of the purchase price, if you buy a property for €500,000 for example, and in the future sell it for €400,000, but your mortgage is still €450,000, you will need to find €50,000 to pay out that mortgage.
This risk is only realised when you sell but as an expat, you may be required to sell if you have to move countries.
Other Considerations
It is important to realise that property markets in Europe are not uniform and that the city or country in which you are living may have a vastly different property market than in your home country. One example of this is residential property investing to rent out. In many places in Europe it might not represent the opportunity it does in the US, the UK or in Australia, for example. Some countries have rent caps, good for tenants but not so good for property investors.
Importantly, if you do have to leave and move to another country on your expat journey, you can be faced with tough decisions about what to do with your home. You may find restrictions from your lender in holding the property and renting it out. They may require a larger payment against the mortgage and/or an increase in the interest rate. You will then have the costs of a property manager, insurances, and all the associated risk and expenses of managing a property in a country in which you no longer live.
In summary, whilst there are good reasons to buy a property as your home when you are living in Europe as an expat, it does come with risks and it is important to think of the risks as well as the opportunity it presents and to the future of what you might do when you leave.
Ultimately, the answer to the question of “Should I buy a property when I am an expat in Europe” is it depends. It depends on your particular circumstances, so seek out professional advice so you can make the best decision for you for now and in the future.
