What effect does war or large scale, prolonged military conflict have on property prices?
On a first principles basis, this is what we know about real estate
- Inflation hedge. Rents and prices for property generally rises together with the inflation rate.
- Derived demand. i.e. demand for houses due to population growth results in demand for houses, apartments etc. Demand for legal services results in demand for office space. Demand for retail therapy results in demand for shopping mall space
- Tangible. Real estate can be felt, touched and seen
- Requires management. You can’t buy a house, office or retail space without managing it.
- Low liquidity. You can’t go to your broker, snap your fingers and get cash in exchange for your property.
What would happen in a time of war?
If you’re living in a conflict zone, your property might be bombed out and reduced to rubble. In that case, quite simple. No more property = lost of asset and money (unless you have insurance).
But what if you’re not living in a conflict zone like Syria, Iran and Ukraine etc? For those living in Asia, the South China Sea conflict could boil over. For those in the Middle East, there’s a war between factions being waged. In South America, there’s drug wars.
How do these events affect property prices in the surrounding neighborhood?
I propose a Target Board framework to look at it. Location is really important to real estate, and this helps us break down the question into parts based on geography.
With that, I propose the Target Board.
Target Board
The 3 parts to the target board. You and your property are
- In the conflict zone.
- In the immediate area surrounding the conflict zone i.e. 5-10km.
- In the country/region surrounding the conflict zone. If you’re in a large country, you could be on the other side e.g. Australia and the US’s East and West coast. North of South Korea and North of North Korea. Or you might be in a small country e.g. Hong Kong, Singapore
If you’re in the conflict zone, you’re down on your luck. Your property will most likely be destroyed. Good on you if you manage to escape with your life.
Anticipating war’s effect on property in the conflict zone is easy.
The more interesting question is what happens if your property is in the surrounding area?
Let’s look at it from a demand and supply perspective.
Will people, companies and businesses be demanding space in the surrounding area? Unlikely. This suggests prices and rents could fall. On the other hand, there won’t be supply because developers, builders and engineers won’t want to build and construct in the area.
If there is peace after the conflict and your house or building happens to still stand, you’d be in luck. Businesses and people coming back to the area would need somewhere to put down roots. Your property would be in demand.
If you’re on the other side of the country, it would be most likely that your property won’t be affected directly by the conflict. Sentiment in the economy and capital markets would affect your property, though the influence would be less than the effect the immediate surrounding has.
So then, it’s not so easy anticipating the impact war has on property. But the Target Board framework built on first principles does make it easier.