Anyone involved in the real estate industry - be it an agent, private seller, or potential buyer - is aware that the price of Phuket property has been rising. In this article we discuss whether prices can continue to rise month after month, and whether this is sustainable over the long term.
Prime Locations Are Key
To borrow a hackneyed expression, real estate is about “location, location, location”.
Certain areas of Phuket have always attracted more buyers than others. The West Coast, with the lure of the Andaman Sea and miles of beach front, appeals to more potential buyers than the East Coast, but on either coast those properties in closer proximity to the sea tend to be in greater demand than those further inland.
This is seen perhaps most clearly in the extremely high demand for new projects in Bang Tao, Laguna, and even Layan, over the last 18 months. Even further inland villas in the Pasak area seem to be attracting buyers, while Bang Jo (with its proximity to Blue Tree) is also seeing development.
In the South, Nai Harn has always been popular with buyers, but the market there is very different, with more mature projects and a scarcity of new land for development. This is in stark contrast with Cherng Talay and the Thalang area, where there is ample land for future development, albeit further inland.
Phuket has always been a slow velocity market, with both villa and condo resales taking much longer than their counterparts in foreign real estate markets. But given the pace at which some projects in high-demand areas have recently sold out, the demand could almost be described as frenzied.
Some international news publications such as Bloomberg have suggested that the Phuket property market is on fire, mainly due to the influx of wealthy Russian nationals to the island. But this does not appear to be a broad market boom, as many Russian buyers seem to have settled in specific areas, meaning it isn’t necessarily an island wide phenomenon. And some existing sellers are left frustrated, wondering why their own properties linger on the market.
These monumental price hikes may be concentrated in specific areas of the island, but prices are also rising elsewhere in Phuket (not considerably, but noticeably). That said, no matter where you look in Phuket today, the property price inflation is not limited to landed property.
New luxury condos in high-demand areas have seen the same strong uptick in prices as villas. While some new condo units in popular areas, albeit without a sea view, can still be picked up for around 100,000 THB per square metre, other new developments are in the 200,000 THB per square metre range - something which seemed unimaginable just 24 months ago. Other established condo developers have taken a different path. Realising the greater buoyancy of the villa market, they have turned their attention from condo to villa developments.
Of course, this could simply be the market catching up after the Covid lull, but when plotted on a chart against historical trends, prices have gone well beyond merely reverting to the mean. Furthermore, “old timers” on the island all agree that Phuket real estate has never experienced the sudden spike in demand and price we are seeing now - especially with new builds in prime areas.
The Phuket real estate market has never experienced the dramatic upswings and perilous downswings seen elsewhere in the world. Even over the last 15 years, with artificially low interest rates ushered in around the world by the 2008 financial crisis, we have been left largely unaffected. This is due in large part to the fact that foreigners buying property in Phuket (indeed, in all of Thailand) must pay in cash. The lack of mortgages means there cannot be speculative finance-fueled booms, followed by gut-wrenching defaults and price collapses.
What Phuket does have in common with other global real estate markets is that land values are an obvious driver of price. As land prices have steadily risen over the last two decades in Phuket, so has the value of property. This may be self evident to many people, but on an island with a finite supply of land, the impact of land prices on current and future property valuations will always be apparent.
There are, of course, other fundamentals driving property values. Inflationary pressure on construction costs, materials and labour play their part, but in a stable economy the main driver is land prices. In other real estate markets, interest rates have major influence, but with the foreign market in Phuket being cash only, interest rates only enter the equation if the developer chooses to finance their projects with borrowing.
Given the rising demand, we are seeing new luxury villas being built on land which even 5 years ago developers may have deemed unviable. Previously undeveloped areas of Phuket (e.g. buffalo pastures, or neglected rubber or pineapple plantations) are now home to high-end residential developments. Being a relatively small island, you are never more than 30 minutes from the beaches and sunsets on the Andaman coast, so this new luxury accommodation is attracting buyers.
Today, the demand in a previously underdeveloped area of Phuket may be spurred by a new school, shopping centre, tourist attraction, or even a newly built road. As long as the projects are of excellent quality and buyers can see value (especially relative to the price they received selling their home in their country of origin), we are likely to see more development in areas previously ignored.
On some new builds, the price increases stoked by this demand are taking a more covert form - much smaller plot sizes selling for the same money, a phenomenon aptly referred to as shrinkflation.
Whatever the type of inflation we are seeing and wether it is the buying frenzy we have seen in some areas, or the more typical mundane growth in others, prices continue to rise island-wide.
What Is Driving the Current Boom?
We see three primary reasons for the sudden increase in prices: inflation, supply-demand dynamics, and improvements in technology (although other factors dovetail into this, as you’ll see).
Money supply increasing faster than the economic output of a country was once the very definition of inflation. During the last two decades, there have been mammoth amounts of cash pumped into the global economy from nearly every country in the world, which has created an unprecedented increase in global money supply. More money in circulation leads to higher prices across a broad range of tangible assets, including property.
A short study of global macro-economic trends over the last 100 years shows us that when money is created in inordinately large amounts that it almost always flows into real estate, hence, we have seen property prices moving steadily upward across the globe.
It is worth noting, however, that property prices in some countries certainly appear to have peaked, and adjusted for inflation many countries are now seeing negative real returns in real estate. This is being driven by tightening global credit markets, but as we mentioned above, Phuket is a cash only market for foreign buyers, and is not impacted by rising mortgage rates.
The second reason goes back to the simple law of supply and demand, which apply to every single commodity or tradable asset in the world. We spelled out some of these demand and supply dynamics in a previous issue of Window On Phuket Magazine.
Essentially, the equilibrium price for a property in Phuket (or anywhere) is determined by the relationship between the supply of properties on the market and the strength of the demand for those homes. As long as buyers’ demand for property continues to outstrip the supply on the market, prices will continue to rise. The current demand from new arrivals seeking a home in Phuket is unquestionably the highest we have ever seen, which is driving fresh infrastructure projects, new international schools, and the higher property prices that go along with them.
The third reason is the giant leap forward in technology the world has witnessed over the last 15 years. We intimated above that this one required a little unpacking because it is pretty clear that computers are not purchasing Phuket property. But the people who are buying villas, bungalows and condos across the island have seen their lives transformed by technology, and the best embodiment of this is the digital nomad.
We first wrote an article on this subject for our clientele in 2010 (then revised it 2012). Telecommuting or working from home, as it was then called, was a novel option that few people considered. But over a decade ago there were already people (admittedly, mostly in the IT and service industries) who recognised that they could swap their desk chair for a lounge chair and work beside the swimming pool.
After everyone around the world became a digital nomad during Covid, the idea of going back to a desk job became very unappealing to vast swaths of the work force. If home is where you hang your proverbial hat, the office is now wherever you open your laptop.
The Thai government has been adept at spotting this trend, even offering new visas to accommodate such professionals. So in a way technology is even adding to the demand side of the supply-demand ledger. Why would anyone work in a cold, rainy city, pitch black at 4 PM for 3 months of the year, when they could just as easily live on a tropical island in paradise?
Rising land prices are a symptom of these three causes, but there is a less often considered fourth cause, which is also linked to demand - tragedy shining a spotlight on Phuket.
Prior to the Tsunami, Phuket was still relatively unknown outside of South East Asia and Australasia. The death and destruction which befell Phuket on Boxing Day 2004 attracted the sympathy of the entire world, but when Phuket was once again “open for tourism” it also attracted the interest of people who previously couldn’t even find the Andaman Sea on a map, much less the island of Phuket.
We have often made the point that the real estate market thrives off the back of the tourism: people visit Phuket, people love the island, people return, people buy property. The tourist numbers began to take off after the Tsunami, and the price of a property increased along with the fresh demand.
Are Current Trends Sustainable? What Could Go Wrong?
Having been berated by readers of previous articles for supposedly sugar coating everything, and viewing the Phuket real estate market through rose coloured spectacles, it is important that we address any risks which may upset the runaway apple cart. (In our own defence, while we clearly love living in Phuket, we feel we have always provided a balanced view of buying property here, with some potential pitfalls not exactly unique to Thailand.)
The insane amount of money being printed around the world and the demand for Phuket property (both mentioned above) are indeed two sides of the same coin - one cannot survive without the other.
But we cannot rule out the possibility that the expansion in money supply may reverse at some stage. Should this spanner be thrown in the works - if the sea of excess money in which the earth is swimming were to ever dry up - the number of people with the purchasing power to buy property here would likewise be diminished. As a cash only market, Phuket avoids the booms and busts associated with financing, but it could not sustain the removal of the excess savings people need to buy property here.
Predicting the policies of central bankers (i.e. money flow) and what global (or local) crises may lurk in the shadows is impossible without a crystal ball. But if demand is one day not there to backstop the market, the current trends will cease.
There are always going to be short, medium and long term risks. It could be severe storm damage, a boat disaster, or tourists shot in a shopping mall. On a macro scale examples include geopolitical concerns such as war in the Ukraine or Gaza, BRICS nations creating their own currency, or global financial instability. Some of these events are predictable, others are not, but whether localised or global, they all have the potential to impact both Phuket tourism and the real estate market.
It is also worth bearing in mind that one or more of the above risk events could trigger the rest, so that all the dominoes fall together. Any such contagion would lead to the inevitable drying up of global liquidity and a deflationary spiral which would change the landscape of the real estate sector, not only in Phuket, but across the globe.
No matter what the future holds, it will almost certainly come as a surprise. What some analysts believe to be inevitable is not necessarily imminent. Any of these potential threats to the property market may be 5 or 10 years away - or longer.
We have never experienced a broad market crash in Phuket, and the people arriving in Phuket in ever greater numbers - not merely as tourists, but increasingly as residents - obviously see value in the real estate here. When we asked one property professional in Phuket why prices were rising so much, he replied: “Well . . . they are still coming, and they are still buying.”
In short, we will continue to be optimistic about the Phuket property market until we are not. The factors currently driving the market do not look like abating any time soon, so even if some of the long term uncertainties do indeed appear inevitable, they certainly do not appear to be imminent.
By Thai Residential Real Estate Advisors