Serious Money:Property appears to have replaced stocks as the investment of choice for many individual investors. The 1990s mantra that stock prices always go up has been usurped by the conviction that investment in bricks and mortar never disappoints, writes Charlie Fell.

Global property markets are in the throes of the greatest boom of all time, which has seen the value of stock in developed markets increase by more than $30 trillion (€23 trillion) over the past five years. The wealth creation is almost double the losses incurred during the meltdown in stock markets from 2000 to the end of 2002.

The confidence engendered has precipitated increasingly irrational behaviour, and property supplements in newspapers and business magazines are filled with advertisements that highlight the attractions of ever-more exotic locations as lucrative destinations for hard-earned monies. Investors can take their pick from Cyprus, Dubai, Turkey and eastern Europe as the democratisation of global property reaches fever pitch.

Bulgaria and Romania are the new kids in the EU block and, not surprisingly, house prices have been on the rise in recent years. Median house prices have jumped by almost 60 per cent in Bulgaria since the end of 2004, while gains of roughly 40 per cent have been recorded in Romania over the same period.

Prices are purportedly cheap, based on flawed comparisons with absolute values in Ireland and Britain, and are expected to continue their upward march on the back of solid economic growth and a rising tourist industry. Properties on the Black Sea coast have advanced on the misconception that the Black Sea is the new Mediterranean, while urban prices are rising in expectation of the pending economic boom due to EU accession.

The Black Sea is believed to compare favourably with the Mediterranean as there are no tides, while the sea is warmer and less salty.

Unfortunately, the climate does not do so well. The summer is only four months long and the remainder of the year is too cold to attract even low-paying guests. Thus, rents must be extremely high during the summer to earn an attractive return.

Unlikely as that is, the ability to achieve high rents is hampered further by the increasing supply, notably in Bulgaria. With regard to urban properties, it is true that economic growth is likely to be concentrated in the big cities such as Bucharest and Sofia, but the ability to secure a rental is hindered by the high level of home ownership. Owner occupation levels of 95 per cent in both countries are the highest in central and eastern Europe.

Economic performance has been good in recent years.

Romania has enjoyed an average rate of growth of more than 6 per cent since 2003, while Bulgaria has recorded growth rates of 5 per cent over the same period.

However, serious improvement is required if the euro is to be adopted in coming years.

The external position in both countries is not sustainable. Real exchange rate appreciation and vigorous domestic demand has seen Bulgaria's current account deficit increase to almost 16 per cent of gross domestic product, while Romania's deficit is 11 per cent. Furthermore, lending growth has been extraordinarily rapid in recent years and the share of loans denominated in foreign currency amounts to 45 and 47 per cent in Bulgaria and Romania respectively.

This leaves both countries vulnerable to an external shock that could trigger a sharp correction in exchange rates and a spike in interest rates. The domestic policies required to address the imbalances means that neither country is likely to record growth rates of more than 4 per cent beyond 2009.

Although Bulgaria and Romania joined the EU in January, both will continue to be monitored by the European Commission to ensure that they meet their membership obligations in critical areas. Corruption is a problem in both countries. Transparency International ranked Bulgaria 57th and Romania 84th in its corruption perceptions index.

The World Economic Forum ranked Bulgaria 72nd and Romania 68th in its 2006 Global Competitiveness Report. The ratings suggest that the Balkans is not a particularly attractive destination for foreign direct investment.

Both Bulgaria and Romania face serious demographic challenges. The Balkan population is in decline as the number of lifetime births per  woman has dropped to 1.3 in both countries, well below the so-called 2.1 rate required to maintain a stable population.

The aged dependency ratio - the number of persons aged 65 and over relative to those aged between 15 and 64 years - has jumped from 20 to 25 per cent in Bulgaria since 1990 and from 16 to 21 per cent in Romania.

The implications for house prices are clear. As housing becomes less scarce relative to the population, downward pressure will be exerted on prices. House prices in Bulgaria and Romania look cheap in absolute terms but relative to income levels they are increasingly moving out of reach for the local populace. The underlying fundamentals are not particularly encouraging.

Prospective buyers are late to this particular party and new investments could lead to dismal results. The cardinal rule of investing is to never lose money.

Unfortunately, fools and their money are easily parted.

charliefell@sequoia1.ie