British Overseas Property Buyers in the Eurozone

Tailored Home commences a four part series on the status of British Overseas property buyers in the eurozone and investigates how the strength of the euro to the pound has affected them in the last 12 months.

Background

The euro was introduced as the new currency for 11 Member States of the EU on 1 January 1999 (Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands,Portugal and Spain).  On 1 January 2002, notes and coins were introduced and national currencies phased out in the eurozone.  Five further countries have joined EMU and adopted the euro as their currency since 1999 (Greece in 2001, Slovenia in 2007, Cyprus and Malta in 2008 and Slovakia in 2009), five other countries or territories use the currency by agreement (Mayotte, Monaco, San Marino, Saint Pierre & Miquelon and the Vatican) and six have unilaterally adopted the currency (Andorra, Kosovo, Montenegro, Saint Barthélemy, Saint Martin and the British Sovereign Bases on Cyprus).  The system is managed by the independent European Central Bank through its President and full-time executive, with decisions on interest rates and other significant issues being taken by the bank’s council, comprising these executives and the governors of the central banks of the eurozone countries. 

Value of the £ to euro from Oct 07 to Mar 09

As you can see from the Graph over a 17 month period the value of the pound to the euro has dropped from £1 = €1.44 to £1 = €1.09 in March 09, this represents a drop of 35 cents for every pound or 24.3% decrease. Since October 2008 the British pound has depreciated considerably against the euro.  From 1.30 euros to the pound a low of 1.0202 occurred on December 28th  2008 representing an all time low for the pound against the European single currency.  The fall corresponds chronologically with the unfolding of the global financial crisis.  The pound has been sold aggressively due to fears that the UK economy is overly dependant on the domestic housing market and the financial services sector.  In broad terms that means that in a financial crisis, which originated in the American housing market and spread to other global property markets, the pound seemed particularly vulnerable.  The IMF has noted the weakness of the British economy and a lack of supportive rhetoric and action from the British government contributed to the drop. 

On the reverse side the euro has been extremely resilient to date.  It is much weaker against the dollar but has maintained a strong bid against the pound.  This is due in part to its status as a potential alternative global reserve currency.  At the same time the European Central Bank has been much slower in dropping interest rates, which depreciates a currency. The Bank of England’s aggressive rate-cuts, policy of quantitative easing and its pledges of funds to the financial and other sectors have added to sterling’s weakness

In this four part series Tailored Home interviewed British overseas property buyers who bought their dream homes when the pound to euro was at €1.50 and we see how they are dealing with the fall in the pound. The owners are:-

• Mr & Mrs Jackson – A retired couple who spend between two and three months of the year in Murcia, Spain.

• Mr & Mrs Ball – have three young sons and a three bedroom townhouse in Spain and spend most of their holiday time at their property

• Mr Lynch – An investor who has made the decision to buy off plan properties in the eurozone

• Mr & Mrs Keane –  emigrated to Javea, Spain, five years ago and have a British pension paid in pounds sterling.

Conclusion

In our opinion we don’t think that the pound to euro exchange rates will maintain these levels for much longer. The eurozone has deep structural issues and these will come to the fore.  There is an ever-widening disparity between the health of various countries' economies in Europe and quite how the ECB and the separate governments of Europe are going to address the various issues is hard to tell.  The ECB is seen to be 'sitting on its hands' at the moment and although further interest rate cuts are expected it may be too little too late.  Quantitative Easing makes it difficult to predict what the Bank of England will exactly as the likely impact of the US Federal Reserve measures.  One factor to watch is the widening price differential between countries' debt.  In itself this illustrates the divergence within the eurozone and might spell trouble for the single currency.   We predict a pound to the euro rate around 1.15 to 1.20 within 6 months.

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