How Russia and China Make it Impossible to Buy Property

A couple of weeks ago, I returned from a much needed family holiday. Bravely, the hubby and I decided to drag an almost four year and a two year old on an eight and a half hour flight to Phuket.

What could possibly go wrong?

Truth be told, both of us were keen to switch off from work. Which for me meant no newspapers, no ticker symbols, no stock indices, and no economic analysis.

It’s tougher than it sounds.

I don’t want to bore you with the details of the trip.

But while I did my darnedest to avoid work talk…it found me.

It started when I overheard Mr Smith poolside saying ‘Really? You should talk to my wife…

And the work talk kept going when I was chatting to a local about the property problems in Phuket.

The main tourist town on Phuket Island is Patong. If you haven’t been there…Patong is filled with the kind of Aussies who’d be great extras on Kath & Kim.

I’ve always thought of Thailand as a destination for bogans and Brits on their way to Australia, but I couldn’t help but notice all the Cyrillic lettering on the signs during this latest trip.

I was surprised to see some menus in Thai and Russian…and not in English.

Phuket has seen a large and growing trend of wealthy Russian settlement.

The strength of the Russian Ruble over the Thai Baht has enticed many wealthy — as well as middle class — Russians to the island.

Supposedly, anything below a RUB/THB 0.97 exchange rate means even middle class Russians can live well in Phuket.

This currency pair has been in a steady downtrend, favoring the Ruble, since early 2010.

Russian Ruble versus Thai Baht

Click to enlarge

Locals have been happy to take the Russian tourist money.

But there’s a problem. The Russians like Phuket so much that they’ve been buying property all over the island. And this has been forcing Thais out.

Russian developers have even been snapping up back pockets of Phuket that the locals tried to keep hidden from the tourists. These tracts are then developed into five, six, or even seven story villas, which are marketed to Russians looking for sun and international diversification.

In an attempt to keep the kids entertained during an eight day tropical storm, I visited a play centre in Patong. The TV there had one station and it only ran property ads in Russian. The listings varied from 1 million BHT (AU$35,150) apartments to luxurious 35 million BHT (AU$1.23 million) homes.

A local told me they couldn’t afford to buy a home because of the all foreign capital driving up the price of real estate in Phuket.

I’d heard a similar complaint from Australians just a few weeks before.

Except in Australia, it’s not the Russians; it’s the Chinese.

Barely a week will go buy in Melbourne without some xenophobic headline telling you that we can’t afford to buy property in own country because of the rich Chinese. 

Here, the Sydney Morning Herald reports that wealthy Chinese are snapping up million dollar luxury Australian homes. The Australian tells us that Chinese buy more homes in Queensland than any other foreign investor. The Age reckons total Chinese investment in Aussie property was a tad under $6 billion in 2013.

And the Herald Sun says there’s still 10 million Chinese buyers looking for Australian homes.

Aussie’s swear it’s all the Chinese’s fault we can’t afford homes in our own country. And yet, we see a similar situation in Phuket.

Perhaps it’s not the Russians’ or Chinese’s fault.

What if this increase in foreign investment is part of a bigger economic shift?

After I returned from bogan island — sunburn proof of a restful holiday — I discovered Phil Anderson, editor of Cycles, Trends and Forecasts, had written about something similar while I was gone.

Australia for sale

In an early October update to subscribers, Phil wrote:

In Australia, the door is open (as it is elsewhere) to wealthy Chinese investors to park their money in developments or substantial areas of farmland. This is similar to the effect Russian oligarchs had on Mayfair in London during the last real estate cycle. During the last cycle, the absolute least worry these oligarchs had about Mayfair was the price they were paying.

So the wealthy don’t care what they pay for property. Foreigners shopping in Australia are interested in one thing: a safe place to park their cash.

Phil goes on:

I can’t see this trend of international buyers slowing down anytime soon. Just the opposite, in fact. The world’s wealthiest one percent need a secure property rights system for their wealth just as much as they need international private banking to hide the transaction. Australia is about to experience what most Southeast Asian citizens have known since  experiencing the prior cycle — offshore wealth driving property prices to unheard of extremes.

People with wealth from nations with unstable governments and questionable banking systems will always look for safe places to stash their cash, somewhere they feel confident they’ll be able to get it out when they need to.

Right now, for the Chinese, Australia appears to be the best place for just that.

Phil reasons that the US Federal Reserve drives the current residential real estate cycle.

Historically, each Fed policy response has been to bail out land-price-led downturns with easy money. This occurs, in Phil’s words, because of ‘coordinated government and Fed measures to stave off more banks collapsing. Government spends in areas designed to refloat asset prices.

Currently, the Reserve Bank of Australia is doing its best to talk down the Aussie Dollar. Phil reasons that any additional weakness in the Aussie dollar will only attract more foreign ownership:

A lower Australian dollar will make Australian property look even cheaper to overseas interests who will keep buying.

As the RBA tries to jawbone the Aussie dollar down, Aussie house prices will continue to rise. As for the Thais, greater economic instability will contribute to a weaker baht. This means even more Russians in beachfront condos.

Shae Smith,
Editor, Money Weekend

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Since starting out in the financial markets over a decade ago, Shae has extensive experience across various aspects of the industry. Shae cut her teeth in the derivatives industry, teaching clients basic trading techniques with technical analysis. Joining Port Phillip Publishing eight years ago, Shae has worked across a number of publications, such as Australian Small-Cap Investigator, Gold Stock Trader and Microcap Trader. She’s spent the past two years however, honing her macro analysis skills alongside Jim Rickards, showing Australians how to invest and profit form global macro trends. Drawing on her extensive experience, Shae is a contributor to Money Morning, and lead editor of sister-publication Markets & Money, where she looks at broad macro trends developing around the world, combining them with her distaste for central banks and irrational love of all things bullion.

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