White knuckle ride in Algarve

White knuckle ride in Algarve

It's long been a favourite of Brits looking to buy a second home in the sun, but the Algarve in Portugal is a prime example of a location where history has shown house hunters can reap huge rewards - or lose their shirts.

This week's Rics report highlights how the Algarve is one hotspot where the local property market has been subject to much more dramatic ups and downs than the wider national market.

Until the 60s, the Algarve was only visited by small numbers of Portuguese holidaymakers, but by the end of the decade, luxury hotels and golf courses began springing up, courtesy of UK and local developers.

During the early 70s it was very popular with British holiday and retirement home buyers. "Then, all development came to an abrupt halt after the 1974 revolution, investors lost a fortune, and tourism to the Algarve practically ceased by 1975," says Professor Michael Ball, the report's author.

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Things started to pick up a little over the next few years, with the pace of development really going into overdrive during the late 80s. Well-heeled British property buyers flocked to the Algarve - leaving the region's market very exposed to the vagaries of our economy.

When the UK economy tumbled into recession during the early 90s, sales of Algarve properties collapsed, and things worsened as the economic downturn spread throughout Europe.

"Algarve property prices fell between 1990 and 1994 until they were only 50% of their real level in 1988," says Professor Ball. Many developers went bankrupt. The market then started to tentatively recover but, he adds, it became clear that "expectations of long-term capital gains, firmly believed to be vast during the late 80s boom, had proved to be severe misforecasts".

Then, after several uneventful years, 1999 saw another boom in sales and prices, which lasted until 2001. Since then, demand for property has been reasonable, but the Algarve has largely missed out on the rocketing growth enjoyed by neighbouring Spain. The Algarve property rollercoaster took another downwards dive in 2003, when Portugal brought in new laws relating to the ownership of property by foreign companies. This had been a popular way for Brits to buy property and avoid potentially being hit with capital gains tax.

As things currently stand, there are "tentative signs of a slow recuperation," says Professor Ball, but much will depend how the UK and northern European economies fare going forward.

Nevertheless, all the evidence suggests the Algarve remains popular with would-be holiday and retirement home buyers (footballer Michael Owen and TV presenter Judith Chalmers are among the celebrities who have villas there).

Anglo-Irish property company Oceanico Developments, which specialises in the western Algarve, will next month hold a launch event for UK and Irish investors to promote Belmar, its €60m (£41m) "five-star spa and beach resort" located 45 minutes from Faro airport.

Guardian Unlimited © Guardian Newspapers Limited 2005