Now may not be the best time to invest in global property, even if sunnier climes tempt, says John Stepek.

There are many good reasons to buy property overseas. For frequent travellers, or those who live and work in more than one location, it can be about convenience. For those who perhaps plan to retire to a well-loved holiday destination, it can be about forward planning and a dash of romance. But what about the investment outlook? Is now a good time to buy residential property abroad, purely as an investment?

The short answer is probably not. While every market is unique, and I am making generalisations, a lot of the tailwinds that have helped to drive prime property prices higher in recent years are turning into headwinds.

There’s no doubt that property in prime locations has been a good investment since the days of the financial crisis. As Yolande Barnes of upmarket estate agency Savills points out, prices in most global cities have soared since 2012. Prices in Shanghai have more than doubled. San Francisco, Dublin, Amsterdam, Vancouver and Sydney are among several cities to have seen prices rise by more than 60 per cent in that same
period. That has left many residential markets looking expensive, certainly by historical standards, and on measures such as local income to price multiples.

What’s been driving this? The most obvious factor is monetary policy. After Lehman Brothers collapsed in September 2008, central banks around the world slashed interest rates and printed money, using quantitative easing (QE). Those who were able to borrow money could get it very cheaply. As a result of this loose monetary policy, asset prices worldwide – particularly anything associated with a reliable income, such as property – shot up.

The backlash

This loose monetary policy is now reversing. Central banks have either ended QE or are talking about doing so, while interest rates – most notably in the US – are on the way up. As debt grows more expensive, so the yield required from an income-producing asset needs to rise. That means either rising rents (which seems unlikely, given low wage inflation) or falling prices; or a bit of both.

It’s not just about tighter monetary policy, however. It’s also about politics. Another big tailwind pre-financial crisis was the embrace of globalisation, and the idea that money, goods and people should be able to flow freely across the world without restriction. That’s changing, slowly but surely.

For many of the world’s ultra-wealthy, property in prime locations in global cities became a safe haven after the financial crisis. You couldn’t trust the banks. You didn’t know which companies were going to survive. Even highly indebted governments might be in trouble. So bricks and mortar in desirable global boltholes seemed a good bet.

But property is becoming less attractive to the elite. There’s a perception (largely justified) that policies adopted to save the financial system – while perhaps necessary, at least at first – favoured the wealthy, by driving up asset prices. That perception has helped to fuel voter anger, giving rise to a new, global era of populism.

As a result, there has been a significant backlash in even ostensibly pro-globalisation countries. Locals have been priced out of their own cities. So governments across the globe – from Vancouver to London to Shanghai – have introduced tighter restrictions and higher taxes on purchases by foreigners. New Zealand – possibly sick of being the subject of billionaires’ zombie apocalypse fantasies – is looking at banning sales of property to “foreign speculators”. This sort of move is unlikely to make houses any more affordable for locals in London’s Zone 2, say, but it does assuage some of the voter anger.

More importantly, politicians – keen to raise funds to plug the gaping holes in balance sheets – are increasingly talking about wealth taxes. Few forms of wealth are as easy to tax as property. You can hide your global income; you can stash your art in a vault in Zurich; you can carry gold coins and diamonds with you. But your property is stuck where it is, highly visible. That makes it a prime target for cash-strapped politicians.

In short, debt is getting more expensive, and governments and voters are increasingly hostile towards the footloose elite and the forces of globalisation. That’s not a promising backdrop for residential property as an investment. Indeed, prime property in London has been falling in value for a couple of years now. I’m not saying you shouldn’t buy that pied à terre you’ve had your heart set on; but I am suggesting that if you’re looking at property purely as an investment, it might well be better to wait until this particular cycle has reached its nadir.

John Stepek is executive editor of Moneyweek magazine