August 1, 2017

The housing crisis is typically interpreted as a crisis of supply – i.e. houses are too expensive because we don’t build enough of them. However, prices are a function of supply and demand; so as well as too little of the former might there be too much of the latter?

For instance, if housing units in global cities like London and New York are purchased not as homes, but as investment opportunities for absentee owners might that not be pushing up prices at the expense of people who just want a place of their own in the communities where they live and work?

In the New York Times, Emily Badger investigates the impact of foreign money on local housing markets:

“…the true extent of the phenomenon is maddeningly hard to measure. So are its broader economic effects. Local governments have barely attempted to track the cash influx. And each of these global cities has become attractive to investors partly because housing in them is scarce, making claims of insufficient supply and excessive demand all the more difficult to untangle.”

Nevertheless, there’s no doubting that the inflow of capital is on a massive scale:

“New data this week from the National Association of Realtors estimates that foreigners, led by the Chinese, invested $153 billion in housing in the United States in the year that ended in March, up a remarkable 49 percent from the previous year. Nonresident foreigners were responsible for half that total.

“That is the largest sum since the organization began tracking foreign investment in 2009, and those purchases amounted to 10 percent of the dollar value of all existing-home sales in the United States last year. Nearly half of that money went into just three states: California, Florida and Texas.”

Badger notes that local grievances are with “foreign money, not foreigners.” Indeed, it is the openness of the cities in question that makes them such attractive destinations for investment.

Of course, in speaking of ‘investment’ one has to qualify the word. When a city seeks to attract investment it isn’t primarily concerned with the financial return to the investor, but rather the associated boost to the growth, productivity and diversity of the local economy. Investment (or, rather, speculation) in property that already exists – and which already has a use – does not achieve any of these benefits. If foreign investors were buying into the city so that they could live and work there, that would be different. But when homes are left empty or rented out to a re-proletarianised ex-middle class, there is clear disbenefit.

This is a self-compounding problem. The further that prices and rents are pushed up, the more attractive a property market becomes to speculators – and in a globalised economy, the pool of potential investors is more of an ocean.

Emily Badger’s article is unusual in that it concludes with what just might be the solution:

“Rhys Kesselman, [a] professor at Simon Fraser University, has proposed an intriguing alternative: a property surtax tilted toward high-end homes that would be deductible against the owner’s income tax. Local residents paying income taxes would effectively owe no surtax. Out-of-town investors, foreign or domestic, who don’t work in the local economy would be hardest hit (with some concessions for resident retirees).

“The elegance of that idea is that it doesn’t require local governments to figure out who is foreign and who is not, or which homes are vacant and which are occupied. And it recognizes that the real problem isn’t foreigners; it’s speculation in the housing market…”

There’s an idea for Brexit Britain: open to the entrepreneurs of the world, but not the carpetbaggers.