Dateline: Kuala Lumpur, Malaysia
Look outside the large windows in my home here in Kuala Lumpur and you’ll see all kinds of developments going up.
To be honest, spending almost all of my time in the emerging world has made me quite used to this kind of thing. New construction is happening all of the world in places that actually have a reason for the economy to grow.
Of course, there comes a time when this construction reaches too high a pitch and a bubble forms. That is the sort of thing we try to talk about here; how do you know whether that investment in Cambodia is getting in at the right time or whether you’re too late?
The sudden, nonsensical strength of the US dollar has caused most emerging market currencies to plunge lately. My Hong Kong dollars – basically a side bet on the US dollar – have been going a whole ten percent further here in Kuala Lumpur as of late, as the Malaysian ringgit has dropped from 3.11 to 3.46 in a matter of weeks.
That means property here is cheaper for western buyers, even if I do expect a small correction in the near term.
Overall, however, I expect Malaysia to do well in the long term, despite the fact that western financial commentators have made a business out of complaining about emerging markets investing in an effort to pump up the rigged stock market for their advertisers.
While there are certainly some developing areas that are overpriced, in reality, it is the developed world that is home to the world’s most overvalued real estate markets.
And unlike here in Malaysia, these markets have no real reason to bounce back.
One recent study suggested that London, the UK’s top real estate market, is a whopping 30% overvalued. This figure was calculated by looking at local salaries and the costs to rent and buy real estate.
In the UK, London’s “non domicile” residency program, which basically allows foreigners to pay rent to live there and enjoy territorial taxation, has driven prices through the roof.
Just as reality TV shows like Million Dollar Listing have glamorized the bubble-worthy real estate playgrounds of the uber wealthy in places like Beverly Hills and South Beach, housing prices in London’s wealthiest neighborhoods have gone through the roof thanks to Middle Eastern sheiks and wealthy Chinese settling in as a status symbol.
This means it has become quite a chore for the local Brits to find an affordable place to stay as high-end property becomes the norm in more and more areas of the city.
High taxes and the high cost of living in London suggests to me that this scenario will not only cause economic problems, but will eventually lead to some sort of political and civil unrest.
When westerners in democratic societies can’t afford their rent, they take to the streets and elect socialist politicians to enforce “justice”.
Just look at socialist Amsterdam, where property prices didn’t even beat inflation over a period of THREE CENTURIES.
The UK has been a dwindling empire even since its colonies starting picking themselves off years ago, and I see no reason for this totalitarian state to regain any of its former glory, colonies or not.
Outside of collecting rent from status conscious foreigners, there is no great economic driver in the UK. And if we know one thing about politicians, it is that they will always screw up a good thing.
Case in point, Britain recently set out rules making it harder and more expensive for future applicants to gain “non dom” status, and reports suggest that the wealthiest residents are already looking to other places in Europe as a result.
That’s why not only is UK real estate overvalued, but it could suffer some sort of crash if the government decides to spit on what drove property prices there to such high levels in the first place.
Owning real estate in a dying democratic country is a recipe for disaster because the increasingly poor voters will make sure you lose money.
In fact, politicians throughout Europe have torched their real estate markets so badly that many retirees who moved to other parts of the continent can no longer even afford to return to their home country.
However, the UK is not the only overpriced real estate market in the world. Other Commonwealth markets are also reported to be overpriced by a factor of double digits.
The commodity markets of Australia and New Zealand are overpriced, while Canada’s real estate market is about ten percent overvalued.
Just as is happening in the UK, the Canadian government shut down its national Immigrant Investor Program recently, shutting out thousands of Chinese investors who were in the process of buying multi-million dollar homes in Vancouver and other cities and angering the Asian immigration community.
Some of those buyers, who had intended to move to Canada and subject their wealth to Canadian income tax, are now looking elsewhere, and Canadian real estate owners are left holding the bag.
While I don’t deny that these markets have experienced an injection of emerging world cash, and that I frequently suggest that investors should follow Chinese and Middle East investors, I simply don’t trust western governments to keep any kind of real property appreciation on the table.
It is why I am opposed to investing in US real estate and the bubble brewing there.
If you don’t believe that, look at Spain. While the southern European country is only a mere five percent overvalued, down from double digits a few years ago, the country has basically kicked property rights in the teeth.
Spanish real estate owners have had to deal with squatters and all sorts of other issues because the government left them for dead during the recent economic depression.
And foreign investors in Spain have reported taking haircuts of as much as 70% on their properties. If warm weather, great culture, and sandy beaches can’t keep property values even in tourist areas from plummeting, you know you have a problem.
So just what are the world’s five most overvalued real estate markets?
1. New Zealand
5. United Kingdom
On the flip side, some of the cheapest places in Europe to rent or buy real estate include Germany and Portugal. Of course, many of these surveys don’t include up-and-coming European countries like Hungary, where despite a crazy government, real estate is pretty darn cheap.
While I believe that there are some solid reasons to follow the “new rich” from places like China, the bottom line is you have to do your own homework to make sure your real estate investments – or any other investments – are being made for the right reason.
There will always be status conscious consumers who want something that is foreign to them. For many, that means living in London and gobbling up luxury real estate at nosebleed valuations.
If you actually want a return on your money, however, you must understand that dying western countries combined with economic mismanagement combined with high level of government intervention is usually not a recipe for high return.
That’s why I recommend high yield investment destinations you can actually make money in.
If you are interested to invest money at higher returns, apply for a Strategy Call so we can determine your best options as part of a personalized and completely legal offshore plan.