How to effectively manage cross border investments to mitigate housing price bubbles

Housing price bubbles are impacting the real estate industry. As of January 1st, 2017, new Chinese capital restrictions went into effect.

The full impacts have yet to be felt, but the intent is clear; to reduce capital outflows. Until recently Chinese buyers were accelerating the number and dollar volume of overseas investment home purchases. This phenomenon has been spurred by a weakening yuan, rising local Asian real estate prices, and the perception of greater relative safety in some foreign residential real estate major core and gateway cities. Now, a signed pledge regarding the use of foreign currency transactions, along with a detailed account of the planned uses for those funds are investment prerequisites. Violators face stiff penalties. Beth Mattson-Teig in the National Real Estate Investor points out that, “Chinese investors were the most active foreign capital group last year.” So, it’s logical to presume these new restrictions are sure to have a broad impact.

Regardless, steady value appreciation and a stable political environment continue to attract foreign investment, worldwide. The United States has been a leading recipient of these capital flows in recent years. Per Real Capital Analytics the United States in 2016 saw an increase in cross-border investment as a percentage of total volume. But some are beginning to wonder if that phenomenon is about to wane. According to Bloomberg, these newly enacted policies are killing off lots of deals that were already in escrow but that had yet to close.  This sudden pipeline reduction is having an impact on many markets where the foreign buyers were seeking their real estate havens. London, Silicon Valley, Sydney are just a few of the cities that are seeing contracted deals cancel, fall out or otherwise not close. These three are just part of a growing list of cities whose housing markets cross border capital flow levels are being negatively impacted.

To prevent housing price bubbles, some National governments work to try and manage short term price run ups beyond long term sustainable levels. Domestic home owners seem especially concerned about foreign buyers.  Non-owner occupiers are less likely to use the home, so these homes sit empty. Foreigners won’t ride through a down turn in prices or be attached to it so prices might fall further in a down market. Foreigners are loathed for running prices up and loathed for a lack of loyalty or presence if prices fall.

Rapid price run ups, a byproduct of seemingly endless self-fulfilling and perpetuating phenomenon of disproportionate new “out of town” capital investments in residential housing are not new. In 2015 Sydney, Australia and Auckland, New Zealand, when faced with this phenomenon, figured out a very clean and neat way to address it. Foreigners were simply required to increase down payment levels. So why then are other major, stable, core investment cities of the worlds governments not taking the same approach? Instead of adjusting the down payment levels, we see Hong Kong implementing an increasingly large stamp duty followed by Vancouver, Canada levying a hefty foreign buyer tax, both very similar concepts and with similar, less than optimal results. All that the Hong Kong stamp duty did was refocus buyers elsewhere offshore. Likewise, the Vancouver foreign buyer tax rerouted the investment monies into Seattle, United States and Toronto, Canada, at least for now. But if recent history is any predictor of the future, then don’t be surprised if you start reading about another major gateway city experiencing a bubble-like price run up soon. When price premiums are artificially applied to a specific housing market, the investment capital simply reroutes to a similar, yet less expensive, alternative market. But is that really, the solution?

The solution to preventing bubbles is to set up regulations that are consistent and not subject to change based on the state of the economy. They should remain the same whether the economy is in an upswing or a downturn, although they may have anti-cyclical measures built in to prevent pro-cyclical bubble effects.” – Sara Hsu, Contributor for Forbes.

History has shown that higher down payment requirements can mitigate pricing bubbles more efficiently over the long run, than any tax or assessment will. By aligning investment capital with the regulatory and lending environments, a true win-win situation can occur between the investors, the owner users, and the local municipalities. Any government official in a city experiencing bubble like home price accelerations should focus their regulatory efforts on the lending practices, rather than one off, stop gap, short term, fee based measures which have proven to only redirect the flow of capital. Since when was cross border investment a bad thing?  But then again, I am not afraid of bubbles either.

See you next month in Cannes, France for the MIPIM conference.


Top photo: Getty Images

About Author

Chris Nesbitt, Broker, MSRE Candidate Chris grew up and went to undergraduate university on the East Coast of the United States and has lived and studied abroad. He will be representing The University of San Diego in California at MIPIM this year as a Candidate of the Master of Science in Real Estate Program. He is a licensed Real Estate Broker in California and Texas, is a member of the Urban Land Institute and National Association of Industrial and Office Properties and enjoys sailboat racing.

Comments are closed.