Can Chinese residential property investors be as enthusiastic about Southeast Asia as they have about the West? And if so, what are the implications for disadvantaged urban dwellers?
Housing prices in Sydney, Melbourne, and Brisbane have remained high for the past decade, but debates continue about whether this roaring market is sustainable, particularly amidst stubbornly low iron ore prices. Another factor sustaining property markets is overseas investment, principally from China. A precipitous fall in Australia’s property values and the resulting capital out-flow could have major repercussions in property markets elsewhere, particularly in Southeast Asia. This calls for government attention.
Massive wealth creation in China has produced a vast amount of capital now being shuffled around the world, often in property markets. Chinese nationals invest in places of perceived stability, like Australia, Singapore, Canada, and the United States. In most cases, investments are second (or third, or fourth) properties bought as stores of capital, with Chinese investors increasingly concerned about the stability of their own stock and housing markets. While property owners and tax coffers around the world benefit from this significant and often unexpected investment, the trend also poses challenges for renters and new home buyers.
For investors seeking to escape looming bear markets and tightened enforcement of ownership regulations, Southeast Asia is ready and waiting. In addition to Singapore, where property values have been rising for many years, Bangkok and Jakarta have seen a recent influx of property investment in desirable “expat” neighbourhoods. Nevertheless, values in most of the region’s major cities are still low and ripe for substantial returns, and liberalised laws, investment incentives, and urban infrastructure investment are luring early movers.
Can China’s residential property investors be as enthusiastic about Southeast Asia as they have been about the West? This depends on their perceptions of political and economic stability, and history shows that these concerns are a frequent reality in Southeast Asia. Some investors may be spooked by fresh memories of the 1997-1998 currency crisis, which had significant impacts on Southeast Asia. Others may be repelled by the region’s frequent coups, corruption, and violence against foreigners. However, even modest in-flows of investment due to capital flight from the West’s overvalued property markets could move prices in disruptive ways.
This is discouraging news for Southeast Asia’s many disadvantaged urban residents. Living on the economic margins, these groups are particularly vulnerable to any change in the cost of living. Given that housing is the greatest expense for most households, a wave of displacement could result from only slight increases in property values. In this unfortunate but not unlikely scenario, impacts on families would multiply beyond the inconvenience of forced relocation and practical challenges of a jobs-housing imbalance. Historically entrenched urban communities could be disintegrated.
This loss of neighbourhood-based social cohesion has a sad history in the West. The United States’ disastrous experiments in urban renewal replaced entire neighbourhoods with tower block housing, highways, and commercial developments. American cities did little to manage displacement, and are saddled with social instability and violence to this day – evident in continuing unrest. As such, Asian policymakers have a cautionary tale about investment-driven urban transformation. The causes of displacement differ, but the impacts are similar.
Disadvantaged urban residents in both Southeast Asia and the United States are often trapped in hopeless situations that compromise their efforts to escape poverty, and displacement only exacerbates already growing economic inequalities. In Asia, however, the vulnerability of the urban poor is arguably even higher and could – at its extreme – become an issue of public health, human rights, and even survival. Further, the spread of social media can amplify and publicise this growing discontent. Are Asian governments ready to manage the political blowback?
In responding to such a crisis, policy should not necessarily adopt a protectionist strategy. Discouraging or forbidding foreign property investment may have an immediate and politically splashy effect, but it would ignore the broader economic value of a robust property market and could also send mixed signals to business investors.
However, the fundamentals underlying property markets must be clearly understood. Rising values ideally reflect a healthy domestic economic base; by contrast, a market bubble built on foreign speculation is no reason for celebration. While property is not as liquid an asset as stocks, investors will find a way to exit the market if they anticipate a collapse. During the 2008 financial crisis, divestment occurred over a surprisingly short time in parts of the United States, and once underway the destabilisation intensified.
Southeast Asia’s urban governments can do three things to prepare for this scenario.
First, they must adopt a plan to accommodate displaced families, including temporary financial support and relocation assistance.
Second, urban governments must enact inclusionary zoning laws, which mandate that a percentage of new residential units be reserved for low-income households. For example, amidst San Francisco’s current housing market boom, such laws are among the few policy tools available to protect access for low-income residents. While this intervention does not necessarily guarantee a 1:1 replacement ratio for lost housing, it can still make a measurable impact.
Finally, urban governments must develop creative options for new developable space. Available parcels are indeed rare in Asian cities. However, the density of luxury residential and commercial properties in desirable urban cores will eventually force development to spill outward. Newly dispersed property markets on the urban fringe may generate investment interest in both apartments and free-standing single family homes. While this comes with its own costs – including the loss of agricultural land – it negatively impacts fewer residents per square kilometre. Displacement assistance can also be provided at a lower overall cost.
This is a pivotal time for Southeast Asia’s urban governments. The region is experiencing historic levels of economic growth, but property markets in many cities have been slow to follow. This is good news for low-income families, and even helps urban neighbourhoods retain their local character.
However, with instability in Western markets there is growing interest in foreign property investment, evident from the proliferation of luxury towers and commercial developments. The inevitable tide of residential displacement will exacerbate socio-economic inequality, and may ultimately generate a wintry political discontent inside the sun-splashed cities of Southeast Asia.
Progressive governments that anticipate these trends and plan accordingly will not only protect their most vulnerable residents, but will also be hailed as thought leaders within the marketplace of planning ideas.