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Do Foreign Investments in Real Estate Really Drive-up Property Prices? Here’s What the Research Says

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In the recent announcement of Budget 2020, the Ministry of Finance has decided to lower the barrier of entry for foreigners to purchase Malaysian properties to RM600,000 from the previous RM1,000,000.

From the outset, it seems encouraging to see Malaysia opening up its doors to foreign direct investments (FDI) into the Malaysian property industry, but the move was condemned heavily by several members of the public, citing that foreigners investors have driven up property prices in the country.

It is a compelling argument, but does it hold weight?

REHDA argues otherwise

In a news report, the Real Estate and Housing Developers’ Association (REHDA) has dismissed claims that a lowering of the threshold for foreigners to buy property from RM1 million to RM600,000 would lead to developers raising their prices.

REHDA president, Soam Heng Choon says that property developers are unable to arbitrarily increase the property prices to reach the RM600,000 mark because the property prices have been well established before the property was even launched.

He further explains that the new housing policy only applies to unsold luxurious high-rise properties based in Kuala Lumpur, and major cities in Selangor, Johor Bahru and the Penang Island.

What do the studies show?

In a 2017 report titled “The Effect of Foreign Investors on Local Housing Markets:
Evidence from the UK
“, foreign investments into the UK market is found to have a positive effect on house prices at different percentiles of the house price distribution.

This is because the increased level of foreign capital into the real estate market would raise the demand for property. Since there is only a fixed supply of real estate in the short run, this would tend to drive real estate prices up.

The report also states that capital inflows will boost monetary liquidity in the market, and it tends to create economic booms in the country, which further leads to an increase in asset prices.

In short, what the report says is that foreign investments into the UK market have definitely driven up property prices in all ranges. Not only that, but the report also concludes that there is a “trickle-down” effect, where less expensive properties have seen a price hike as well, despite not receiving much FDIs.

do-foreign-investments-real-estate-really-drive-property-prices-heres-what-research-says-foreign-investment-report

A 2012 study from Universiti Teknologi Malaysia, shares the same sentiment, stating that FDIs into the real estate market has resulted in hour price appreciations. It also states that FDIs only play a minor role in house price appreciation in emerging economies.

In fact, the report also urges policymakers to not worry about the negative effects of FDIs on real estate prices and instead urge governments to attempt to attract more foreign investors instead, as it helps in generating employment and facilitating urban developments.

Plus, research done by Dr Mona Chung from Deakin University, states that there is a lack of evidence acquiting foreign Chinese investors as the leading cause of the high property prices in Melbourne and Sydney. She cites financial policies such as negative gearing, bank profits, infrastructure, and land releases as much more impactful reasons instead.

In the end, will foreign investment into the real estate industry push property prices upwards?

Yes, however, it only plays one out of many roles that contribute to the increase in house prices, and its actual real-world effect changes according to country and circumstance.

Should Malaysian property buyers be wary of the new policy change that might potentially have a significant impact on Malaysian real estate prices?

Not really, because the amount of properties affected by this policy change is severely limited, and these properties are already deemed undesirable by local property buyers because they are overhang properties.

To drive the point home, the Finance Minister has given out a statement, stating that, “This measure (lowering of the foreign barrier of entry) is expected to benefit the property sector without affecting the interest of Malaysians,”

“Existing unsold units in the market now are homes that failed to attract local buyers, hence the lowering of this threshold for foreign ownership will not deprive local buyers”.

Hopefully, this article will give our readers a much more realistic outlook of the property industry here in Malaysia. Since you are here, why not check out our authentic property listings on the Ohmyhome platform?

At Ohmyhome, we have a team of trusted agents who will help guide you on your home buying journey.

Check out our agent services today, or call +60 16-299 1366!


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