I remember that when I was a kid and we went anywhere nice, my parents, probably lead by my father, would stop in front of every single real state agent, wondering how nice would be to have a pied-a-terre there. It didn’ matter if it was a city, a town, or just a village. Then nothing happened, With only a small exception. In fact, at some point they got the idea of renting a flat in an almost abandoled village–at least this is how it felt to me at the time– but after strongarming us to tag along a few times, they evidently had a rare spark of common sense and let it be. And then they continued looking at prices any time they passed in front of a real state agent. Not at the time, but now I think of that as property porn.

I myself also stop regularly in front of real state agents. After living most of my life as a tenant, we bought a house about 7-8 years. We had toyed with the idea beofre, but it were the genuinely horrible landlords we had last, what made the decision crystalize. It was not super easy to find a suitable place because we wanted a house with a garden, in an acceptable price range, and located next to good public transportation. Both the price and the location were absolute musts, but the garden was, at least at the time, much more controvertial because I saw that it would be good for the cats, and I liked the idea of having some outdoor space, but I didn’t want to have to deal with it at all. I therefore floated the idea of concreting it over and, as a concesion to aesthetics, painting it green, but the only reaction was a stare, and that was it with my plan. Anyways, I am happy that I don’t have to deal with landlords anymore. I am happy that if something is broken and bothers me, I can just call somebody to deal with it. And if it doesn’t, it can stay broken. It maked me happy to know that if I put a nail or drill a hole somewhere, then I will do not need to deal with landlords when I move out. It makes me happy to know that I can change a fence, or the windows, or whatever. Buying was a right decision, but having bought does not stop me of wasting a fair amount of time with property porn.

Now, my parents were romantics dreaming with weekends spent in the bucolic landscapes of a semi-abanddoned village, or in some sobre, medieval, old-fanished, bourgois small Castillian town. but, In contrast, believe it or not, I pride myself of being a much more practically minded human being, and when I indulge in propert porn I always have the financial aspect in mind, and not just to decide if I could afford–finance–it, but also if it would make any sense whatsoever. Let’s see. It seems that 60 Eur is a pretty realistic price for two people spending a night in a decent hotel in Burgos, but there is no way you can buy anything decent under 60.000. You could thus spend 1000 nights in some hotel before recovering the amount you paid for an appartment. Note that 1000 nights amounts to spending there each weekend of the next 10 or 20 years, depending whether you stay for a night or two. Now, Burgos is a place where one could actually want to spend some time, but I am working under the hypothesis that my parents didn’t do this kind of calculation very often… But if I am fair, it is clear that they knew they were not looking to buy, that they were just indulging into property porn.

Now, on could look into buying something as an ivestment. In fact, I have thought a few times about doing that, but it didn’t make sense to me. First, one can think of buying to sell. I guess that some people buy a place, fix it up, and then sell after not very much time. Now, if you are as useless as I am, there is not that much that you will be able to fix anything up on your own, so it is going to cost money. Then, when selling and buying, a lot of taxes come together, meaning that the mark up would have to be really big to be worth it. So, buy to fix and sell would not work for me.

On the other hand, you might tell me that one does not need to actually do anything, that the prices of houses always go up. This is what a lot of people used to think in Spain, and I am actually pretty sure that it is what they still think, allowing for some fluctuations. And indeed did prices of apartments in Spain grew a lot. For example, since 1985 they quadrupled (adjusted for inflation). Now, that is a happy return of 3.5% per year since 1985. However, since it was created in 1992, the IBEX 35 Total Return index–the main index of the Spanish stock market, reinvesting dividends–has grown by 7.5% per year, again adjusted for inflation. At 7.5% per year, your capital is multiplied by 18 in 40 years. Now, the stock market is risky. Right, there are long times when the prices crash or go nowhere, but is Spain housing prices have not yeat reached the levels of 2005. In fact, it is not clear to me how can anybody really expect that logn term apparments prices are going to grow faster than overall salaries. So, one can evidently get lucky with the timing, but I would rather expect a 1-2% real price increase each year, and it seems reasonable to me to expect more than that from the stock market (over the long run). Also, and advantage of the stockmarket is that you can sell 5% of what you own, but you can’t really sell 5% of an appartment. Finally, if you invest in the stock market you can derisk it a lot by not putting all eggs in the same basket, but if you invest in real state then, unless you got a real lot of money, then there is not going to be much diversification.

Now, you might be now telling me that I am forgetting the most important part, namely that you can rent. Well, the average rent of an 80m2 appartment in Barcelona seems to be 1200 Eur/month. That is definitively a decent amount of money to get every month. No doubt about that. However how much does it cost you to get those 1200 Eur/month? Well, the average place of such an 80m2 appartment seems to be 400.000 Eur. An straighforward calculation shows that this means that your yearly rental income is 3.6% of the price of the property. Well, that sounds like a decent return. Now let’s do the math. First, all other expenses (taxes, upkeep of common areas, insurance, and so on) seem to be about 2000 Eur per year, meaning that we are already at a 3.1% return per year. But now comes the invisible elephant in the room: the upkeep and regular repairs on needs to do in a property. Now, how much one spends into mantaining an appartment or a house changes from year to year, but one finds pretty extraordinary sounding, and extraordinarily varied, numbers like 1-3% of the selling value. Now, that sounds extraordinary because most likely the owner of our platonic Barcelona apartment didn’t put 4000-12000Eur in there last year. However, people change the kitchen, a bathroom, or paint from time to time. The dishwasher, oven, stove, furnace, and so on also last what they last. If you live in a house, the roof lasts about 30 years, and if you live in an appartment building then the elevators have to be changed, or the facade has to be renewed. So, these expenditures come in pretty irregular tranches, but when they come it can be a big number–a roof is on the expensive side, let me tell you. Now, even if one counts with only a 1% mantainance cost, the return for the landlord is just 2.1% of the value of the property. And well, that assumes that the appartment is rented full time and that the tenant always pays and such.

But there is more becasue well, if you inherit that appartment, or if you have that money in cash because you just robbed some French museum or the other, then 2.1% might be ok. But if you need to take a loan, that all changes. If one takes a loan-to-value ratio of 70%, a 30 year duration loan at 3%, then you pay back 1180 Eur/month to the bank. This means that, taking the previous calculcations into account, instead of a rent of 1200 Euros you end up having to pay 360 Eur/month to the bank, and that assuming that it all goes well.

Now, if you invest 120.000 Eur (your downpayment) and add 360 Eur a month, and after 30 years, you own something worth 400.000 Eur, then you made a yearly return of 2.1%. If you decide to factor in a 1.5% yearly price increase, then you got a yearly return of 4% on your downpayment

  • monthly installment. Now, 4% is not bad, but given that in the whole calculation there are a lot of risky approximations, I decided a while ago that I would just continue watching real state porn, without any ulterior motives.