Building wealth in a low-interest-rate world

Building wealth in a low-interest-rate world

Driving around the area where I live, I've been struck by how many condominium projects there are — too many, it seems to me. It is hard to understand why people want to take the risk of building them when so many exist already. I wonder who will rent or buy them. Or do project developers know something I don't?

The economy expanded by only 0.7% last year. Amid slow growth, more than 44,000 new condominium units were launched in Bangkok and almost 64,000 upcountry — not much different from 2013 despite the political instability in the first half of the year.

I believe housing is one of the most meaningful economic indicators. After all, it is the most important investment for Thai households, accounting for more than two-thirds of household assets. It also plays a dual role as both a consumption and an investment good. Buying a house is the first sign that consumers are confident, and building more housing units is an indicator that entrepreneurs are preparing for an economic upswing.

The booming housing market, however, is causing some concerns about a housing bubble. In recent years, we have witnessed massive monetary stimulus by the central banks of developed countries. The global economy has had more than US$7 trillion in liquidity injected into the financial system — $3.7 trillion in the US through quantitative easing (QE), $1.3 trillion in the euro zone, $1.7 trillion in Japan and $600 billion in Britain — driving down interest rates to an unprecedented low level.

However, many economists believe large-scale stimulus by these central banks has failed so far to generate economic growth, stop global deflation or generate jobs. Instead, it seems to have fuelled prices of financial assets including stocks and real estate, boosting capital gains and financial speculation.

Observers now worry that current easy monetary conditions will stir up housing markets, paving the way for another painful financial crisis. Central banks are torn between the desire to stimulate economic activity and fear of creating another housing bubble.

Despite all the worries, the QE programme, by keeping interest rates low and even negative, has affirmed the attractiveness of real estate as a higher-yielding asset class.

In Thailand, low interest rates have provided an environment for starting new real estate projects. Government infrastructure development plans, especially the mass-transit system in Greater Bangkok, have also added to the optimism. And now that the Asean Economic Community (AEC) is about to be formed, developers have become even more confident that demand will rise.

With its low cost of living, many holiday destinations, a skilled workforce and strategic position in the region, Thailand should continue to attract business and investor interest in good-quality properties as well as good-quality tenants. What looks like an oversupply of real estate today will therefore likely be met by demand once the effect of the AEC becomes clear.

I think 2015 is shaping up as a year of divergence for investors — those who want only to preserve capital, fear a bubble and subsequently accept low returns; and those who are looking for higher returns and willing to take more investment risks.

In a low-interest-rate world, investing in real estate could be a good option for those seeking higher returns. Condominium prices increased as much as 14% on average last year amid a very weak macroeconomic outlook. This is just a little less than the 15% return from investing in the stock market. Prices of real estate also tend to experience less erratic movements compared with stocks.

Many invest in real estate not only due to the high return but also because it is real. Buying this type of asset means you are purchasing a tangible, physical property, not just a claim to a piece of a company as with a stock investment. In other words, you have complete control over what to do with your investment, while a stockholder does not.

Given the many uncertainties in global financial markets, there may be no need to look farther away from home. Buying real estate is like investing in the future. Over the long term, I think real estate could be one of the most valuable and comforting types of investment. It could be something that builds your wealth and allows you sleep well at night at the same time.


Dr Tientip Subhanij holds a PhD in economics from the University of Cambridge and has a dual career in banking and academia. She can be reached at tien201@yahoo.com

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