Is the Overheating Property Market Bad for the Economy?

• 4 August 2021
• Local News
• 2408 Views

An economist from the Royal Academy of Cambodia HE Ky Sereyvath has expressed concern that overheating growth in the real estate sector no longer benefits the local economy and will eventually push housing prices beyond the purchasing power of the local population.

HE Ky Sereyvath made the statement during an interview with RFI earlier this week, citing that amid the pandemic crisis, the government should monitor the real estate sector cautiously and shift the focus to boost production sectors such as agriculture and manufacture.

“We [government] shall reduce [carefully monitor] the real estate sector as the growth does not benefit the local economy. Rather, it makes property values higher and higher, without having any production that generates income,” said Sereyvath.

“Buyers from abroad will destroy all the culture of local production in Cambodia. In the future, real estate prices will reach their peak and stop going up. Then, no more profits can be made. Since we have no production, we will face difficulty,” he added.

The economist’s analysis has left questions among the public as to whether or not real estate negatively affects the kingdom’s economy.

Dr Kim Heang, a real estate expert and chairman of KW Cambodia, declined to comment on HE Sereyvath’s analysis but stressed that the real estate sector still and always will play an important role in driving national economic growth.

“The real estate sector generates a substantial amount of state revenue every year through taxes. On average, the government generates approximately US$3-4 billion of tax revenue per year, most of which are from the construction and real estate sectors,” said Dr Kim Heang.

“These taxes include stamp duty (4%), property tax (0.1%), tax on boreys or condos (about 6% to 8%), and income tax. (20%). If a project is worth US$1 billion, just on stamp duty and borey tax, it’s already 10% or US$100 million,” he added.

Dr Kim Heang continued that it is undeniable that production sectors are very vital for the economy, but the real estate sector is also considered a booster.

“Agriculture, tourism and industry are the core sectors driving the national economy. However, the real estate sector works as a booster or a supplement making the economy grow even faster and larger,” he added.

Besides tax revenue, the real estate and construction sectors also help create jobs and income for local people, which eventually leads to the increase of consumer spending and contributes to GDP as the result.

When property prices rise, local people to an extent will benefit from the buying and selling transactions, either through commission or direct sales. Those will continue to invest more in the country, which also results in more economic activities.

Back to HE Ky Sereyvath’s statement, in another interpretation, he might intend to warn the public as well as the government regarding the risk stemming from the excessive growth of these two sectors.

The warning is indeed in line with the World Bank and the ADB who periodically advise the Cambodian government to cautiously monitor the overheating growth of the real estate and construction sectors, especially in terms of credit growth.

The international bodies do not only advise the government to tighten monetary policy on the credit provided to both sectors but also to come up with policies to control the excessive rise in prices but still remain under the free-market mechanism.

For some experts, the government’s shutdown of online gambling last has stabilised property prices in Sihanoukville to a great extent. Besides, the introduction of capital gains tax that will be implemented early next year will hopefully also help prevent speculators from pushing prices even higher.

• Analysis
• Economy and Finance