Property looks an attractive bet in a world of very low borrowing costs but beware the political risks

Financial markets now expect interest rates to remain at very low levels, close to zero, in fact, for many, many years. This reflects the reactions of governments and central banks to the impact of the Covid-19 outbreak on the global economies. The lockdowns imposed by governments around the world have plunged major economies into some of the worst downturns ever. The authorities have responded by turning on the printing presses and flooding financial markets and economies with money. That means government debt levels have surged upwards, having already reached elevated levels because of the global financial crisis. Governments have to pay interest on that debt and pressing interest rates to the floor and/or generating inflation is the only way they can ever comfortably meet these payments.

So, what are investors doing in response? Investing in property has been an obvious answer over the past decade. If you can borrow money cheaply, rent out the property to tenants or even leave it empty and watch it appreciate in value over time, why wouldn’t you? After all, property is a tangible asset and doesn’t come with all the apparent complications of investing in shares and bonds.

In search of a safe haven
For many people worried about political stability, property in some foreign bolthole is a particularly attractive proposition. It explains why Russian funds have been pouring into Portimão and Chinese money into Lisbon. The problem is locals suffer when wealthy foreigners drive up prices. Property prices in many parts of Portugal are now so expensive that it is increasingly difficult for Portuguese to buy a home in their own country. Tenants are also being evicted as investors renovate properties and seek high-paying short-term rentals using the likes of AirBnB.

But this phenomenon isn’t confined to Portugal. It can be seen across the globe from Amsterdam to Vancouver. Indeed, so many Chinese investors have bought properties in the latter city that it became known as Hongcouver reflecting the first wave of money that came into the city following the return of the erstwhile British colony of Hong Kong to Chinese rule in 1997.

I had some friends who moved to Vancouver a few years back. Renowned as one of the most beautiful cities in the world, it is surrounded by snow-capped mountains and the Pacific Ocean. But few of its inhabitants, according to my friends, were able to enjoy the famed laid-back, West Coast lifestyle. They were too busy working, many holding down two or even three jobs to pay the mortgage or rent such is the house price inflation that has taken place over the past few decades.

Stretching affordability to the limits
Sounds exaggerated? Consider these facts. The average price of a home in Vancouver stood at C$1,298,332 at the end of 2019, which is equivalent to €835,788. The average price of a two-storey family home reached C$2,135,367 (€1,374,621) while condos sat at C$764,009 (€491,824) on average. Meanwhile the average annual salary after tax in the city is around C$40,000. How do locals afford these prices? As Canadians themselves might say, “Go figure!”

Moreover, many Chinese, or other foreign investors simply buy property in the city as a place to park their wealth, free from the potential predations of their capricious government in Beijing. So, the homes remain empty and, given the laws of supply and demand, that places further upward pressure on rentals. Indeed, Vancouver has the highest number of empty homes of any major Canadian city. They account for around 8% of all homes in the city.

The sudden influx of foreign money, however, can cause domestic political problems. Just as many Portuguese resent being priced out of their own country, Canadians are also increasingly alarmed and politicians at the local and national level have responded by introducing a plethora of taxes on property. It is a phenomenon increasingly seen across the world.

Government U-turn
Foreign investors have already been caught out by sudden changes in government policies. Take Malaysia. It is embarked on an incredible building boom with shiny new, towering apartment blocks springing up in major cities across the Southeast Asian country, many targeted at Chinese investors.

Forest City highlights the scale of Malaysia’s vast ambitions. Built on reclaimed land in the Johor Straits that separate Malaysia from Singapore, the US$100bn mega city is one of the largest projects in Asia. When completed it should have an estimated population of 700,000 residents. Unashamedly it seeks to piggyback on the success of the wealthy, predominantly Chinese city of Singapore. The cost of a condo in Forest City is far less than in Singapore and it was hoped that many Singaporeans, as well as wealthy Chinese investors, would buy in Forest City and commute across the Straits.

However, in 2018 the Malaysian government of Prime Minister Najib Razak, enmeshed in corruption scandals, was defeated at the polls, and the successor administration adopted a far less encouraging stance towards Forest City and other developments aimed at Chinese buyers. Covid-19 has also caused sales to stall.

Furthermore, the Chinese government has embarked on an anti-corruption drive and it is now much harder for Chinese citizens to move money out of the country.

According to recent visitors, Forest City, which is far from finished, appears to have an occupancy rate of just 10%. It could become a vast white elephant, crumbling in the tropical sun.

So, while property might look an attractive bet it is worth bearing in mind the risks of a sudden change in the political landscape, particularly at a time when divisions between the wealthy and poor appear to be growing across the globe.

By Anthony Beachey
|| [email protected]

Anthony Beachey is a former BBC World Service journalist now working on a freelance basis in Portugal, where he specialises in economics and finance.