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  • Writer's pictureHin Fah

‘COVID Crash’ in Koh Samui Property

How will the current global situation affect the Koh Samui property sector? Given the economic uncertainty unleashed by the COVID-19 pandemic, there seems to be a widespread belief that this should have some kind of a knock-on effect on the Koh Samui real estate sector. Many potential buyers see this as opportunity to hunt for bargain basement prices in the months ahead.

Photo credit: Phil Bedford (Aerial Photography Asia)

Knight Frank is one of the largest real estate consultancies in the world, and renowned for their objective analysis of global property markets. In their latest report, Knight Frank suggests that once business returns to normal, property prices would not see more than a 5% reduction in price, which obviously supports a more positive outlook.

A highly motivated seller – someone who must liquidate a property quickly – may list a truly cut-price villa, but such owners on Koh Samui are very rarely that desperate to sell. This owes much to Koh Samui’s foreign real estate sector being a cash market with almost no borrowing. The MAKERS estimate that only 1% of properties sold to foreigners here have any bank lending, so neither unemployment nor a credit crunch is going to affect mortgage payments.

But will the likely economic slowdown we face really lead to lower prices across the board? Well, this remains to be seen. While there may be bargains to be found on global stock markets, the multitude of discounted properties which many are expecting (and hoping) to find on Koh Samui may never materialize.

“History doesn’t repeat itself, but it often rhymes.”

Faced with nearly a dozen events in 20 years – any one of which had the potential to damage Koh Samui property market – no crash ever came. Instead, each crisis saw the same flattening of prices, with occasional bargains finding their way to the market. John Keats could not have penned a better series of rhymes.

To address this properly, however, we will have to draw more on Keynes than Keats. In other words, more economics and less poetry. The easiest place to start is a discussion of inflation and deflation, and the forces which drive each.

Both inflation and deflation are technically related to the total supply of money in the financial system, with the printing of excess money resulting in inflation, and a precipitous drop in the amount of money in circulation leading to deflation. In everyday consumer terms, however, inflation is thought of as too much money chasing the same number of goods, which results in rising prices. On the opposite side of the coin, deflation occurs during a contraction in the economy, when less money chasing the same volume of goods can lead to falling prices. (These are essentially the principles of supply and demand we learn in Economics 101.)

The global financial crisis in 2008 was expected to cause a contraction in the economy and the worst global deflation since the Great Depression. That deflation never happened for two reasons:  leverage and stimulus.

Many of the financial instruments which imploded in 2008 had their prices inflated through options, meaning the overall economy did not see a massive contraction in money supply because a lot of that money never really existed in the first place. Just as a sports bet only has value if you win, these failed financial instruments were similarly valued at a huge multiple of the amount of money actually committed to the investment. 

The peaks and troughs found in other property markets around the world are generally caused by credit drying up and the subsequent risk of foreclosure. Because this is a systemic problem across the broader economy, some people are forced to “fire sale” their home, either to avoid losing it completely or to plug holes elsewhere in their finances. Koh Samui does not experience the same volatility because there is virtually no borrowing/leverage in the market.

This is a very simplified explanation for what was an extremely complex series of financial machinations, but the end result was not deflation. Because 2008 involved a banking and liquidity crisis, property prices did fall in many countries, but stimulus reinflated these markets, some of which rose to stratospheric levels. Those soaring property prices were helped along by record low interest rates to encourage further borrowing.

Excess borrowing and mortgages which could no longer be afforded led to the problems in the real estate industry 12 years ago. People who couldn’t make their payments faced foreclosure, and many with interest only mortgages simply handed back their keys, and walked away from their homes.  Property prices fell because very few people had access to the credit (loans) necessary to buy a house, so houses stood empty until low interest rates and recapitalised banks reinvigorated the housing market.

In response to slowdown in the economy today, stimulus packages on a far larger scale than 2008 are being implemented in countries around the world. With the injection of multiple trillions of dollars into the financial system, there is every likelihood the world will once again stave off deflation. And unlike in 2008, part of these rescue packages around the world involve protecting homeowners from foreclosure. If there is no deflation, and if government programs really do ensure that people do not lose their homes, property prices may not be affected in the same way they were a decade ago.

To bring this all back to Koh Samui property, the current state of the global financial system does not pose an inherent risk to real estate prices on the island. Furthermore, the aforementioned Knight Frank report observes that 90% of the Koh Samui real estate market is reliant on foreign buyers, who pay cash for their properties.

So, systemically, we do not appear to be in danger of global deflation, and the absence of borrowing on foreign freehold properties on Koh Samui means that even an owner who becomes unemployed during the COVID-19 crisis will not face mortgage payments which force them to sell their home.

(Sources: MAKERS, Knight Frank, Thai Residential, The Phuket News)

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