Jan222016

Why do politicians want foreign investment in real estate?

Foreign investment costs politicians nothing, and it provides them tangible and taxable assets.

Jeff Koterba cartoon for August 25, 2015 "Roller coaster wall street economy stocks"

Have you ever gone to an Irvine new home model center and seen buses of foreign tourists on a shopping spree? I have, and I suspect many others have seen the same thing. Anecdotally, Irvine homebuilders report 80% or more of their sales are to foreign nationals, particularly the Chinese. These buyers are purchasing homes largely as investments, and in the process they crowd out or price out a local working family who wants to buy a home. Given this strongly negative consequence to rampant foreign buying, why do politicians support it?

First, politicians care about large voter blocks, and the only people upset by this problem are the small percentage of people in the homebuying process. Existing homeowners don’t complain about high prices because they want the prices to move even higher. Renters don’t care because it doesn’t impact them directly.

Second, financially the activity of foreign buyers benefits the community. These people are paying for houses with money from outside the community. The asset is fixed in place and easily taxable, so politicians like it. Further, if it’s a commercial property, the asset is a tax revenue generator from the businesses operating therein. When someone offers to build something at no cost to the local community, something that generates positive tax revenue, no sane politician will oppose it. The result is a very permissive attitude toward foreign investment in real estate.

How permissive? Until recently, politicians didn’t even care if the money was legal or not. If foreign money from drug kingpins or arms dealers wanted to fund construction or acquisition of US real estate, their money was welcome. Most countries don’t even tax the capital gains when the foreign owners sell. Free money is highly sought after.

As wealthy Brazilians snap up Miami real estate, few benefit

Tuesday, 19 Jan 2016

Facing a teetering economy at home, wealthy Brazilians have been pouring money into what they increasingly see as the safest place to invest: South Florida real estate.

So are Argentinians, Colombians, Mexicans, Venezuelans, French and Turks—almost anyone with money to shelter, a direct flight to Miami and a shaky economy to flee. …

And almost no developer expects the demand to stop.

When times are booming, nobody expects the music to stop. But why is this money entering US real estate? Is it due to strong fundamentals, a sustainable cause, or ephemeral circumstances that could change at any moment?

Yet Miamians as a whole have scarcely benefited from the glitz. Wages have actually dropped for Miami workers in the past year. Area unemployment tops the national average. Miami contains the largest share of renters in the country who devote over 30 percent of their pay to housing – the level the government deems burdensome.

The same could be said of Los Angeles. Local wages have barely budged since 2012, yet house prices are 66% higher.

OCHN_East_LA_Housing_Market_Report_2015-9

We’re not seeing the benefits of that income being disposed of in the local economy,” said Ned Murray, associate director of Florida International University’s Metropolitan Center. “That impacts local businesses, and we’re losing opportunities to create year-round housing for our workers. They’re moving out.”

This is the problem when there is an excess of foreign capital entering a market. Rather than benefit the local population, higher prices ends up hurting them. This is one of the main reasons London decided to start taxing capital gains to discourage excessive foreign investment.

No fewer than 126 residential towers are planned for construction in South Florida. One sign of the scale of wealth from abroad is that the majority of foreign purchases are being funded with cash, not debt.

housing_black_holeWhile this has all the signs of a bubble — and it may end horribly for the foreign investors — one key difference is worth noting. Since this bubble is fueled by equity, our banking system is not at risk. Many individual borrowers may get caught up in a collapse, but it’s not a systemic problem like the debt orgy of the Great Housing Bubble.

Last year, foreigners spent $6.1 billion on Miami-area real estate – 36 percent of all such investment, according to the Miami Association of Realtors. Nationally, foreigners account for just 8 percent of sales.

That’s an astounding number, particularly considering how badly condo prices crashed in Miami just a few years ago.

The influx has been sudden enough that the federal government has announced plans to monitor home purchases exceeding $3 million in Miami and New York City. Starting in March, the government will temporarily require title companies to identify buyers of property. Authorities have grown concerned that money launderers may be using anonymous holding companies to stash money in high-end real estate.

(See: US cracks down on money laundering in real estate)

The average luxury condo price in Miami Beach has surged 35 percent from a year ago to $3.7 million, according to the real estate brokerage Douglas Elliman.

That certainly looks like a bubble in search of a pin.

Downtown Miami is similarly “beginning to shift, but the question is, to whose benefit?” said Arden Shank, executive director of Neighborhood Housing Services of South Florida. “It doesn’t benefit the people who have been there for a long time.”

Unless they happen to by condo owners, then the increased value of their holdings is quite a windfall.

ForeignInvestment

The metro area’s unemployment rate is 5.5 percent, compared with 5 percent nationally. Average hourly earnings have dipped 0.4 percent to $22.57 from a year ago. By contrast, the national average wage has risen more than 2 percent in that time. Census Bureau data show that high rents burden 66 percent of Miami tenants, compared with 52 percent nationwide.

This is a huge problem because potential homebuyers can’t save for down payments with high rents; politicians haven’t don’t much to solve that problem either.

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