In Defense of Foreign Investment in U.S. Housing
Absentee property owners from abroad take much of the blame for rising housing prices in America. But they’re really a net win for cities.
Of all the talking points used against building more housing in big cities, one of the most common is a simple question: Why build units that will just get snapped up by foreign speculators? Writing in CityLab recently about the housing market in Vancouver, Andy Yan, a director at Simon Fraser University, discussed real-estate speculators and other outside buyers and pessimistically asked, “Who are we building for?” My colleague Nicole Gelinas recently wrote in Governing that high-rise construction in New York City merely induces demand from the overseas rich, who view the units as investments and keep them empty.
Foreign investors thus get lumped in with other scapegoats who are thought to “take” housing from more deserving recipients. These include Airbnb guests, college students, techies and immigrants, among others. Some cities impose regulations against these groups, cracking down on Airbnb, outlawing student housing in certain areas, or taxing foreign speculation.
But this mindset is impractical, because it ignores the complexity of modern urban housing markets. At a time when global travel is easy and labor more fluid than ever, cities are full of temporary workers and visitors. With rising global wealth -- and instability -- there are also many foreigners looking for second homes, or wishing to diversify their assets by purchasing U.S. real estate.
Cities can respond in either of two ways. They can view these unorthodox housing uses as a legitimate form of demand, and allow enough construction to accommodate it, alongside the more traditional demands. Or they can nitpick about the “right” and “wrong” uses of housing, and write laws accordingly. But one thing’s likely: Neither strategy will stop the activity or cool the market, because no city can just wall off people or capital.
And why would cities want to? Foreign speculation is a net win for municipalities. This kind of development generates impact fees, tax revenue and construction jobs. If units are left empty, it may create bad optics, but it also means the absentee owners are giving money to the city without using services.
If cities really think foreign speculation is a social ill, they should at least note the causes. When cities have a housing shortage, it inflates prices. Speculators (whether foreign or domestic) then view that housing as an investment, since values will continue to appreciate, making it worthwhile for them to buy and sit on properties. By contrast, writes Dan Bertolet of Sightline Institute, in metros that are fast-growing but rapidly adding housing supply, such as Houston and Tokyo, “foreign investment does no harm to housing affordability and may even ease prices if it yields additional homes that end up being occupied by locals.”
In fact, housing supply is what this whole foreign speculation issue hinges on. If a city uses regulations to restrict supply, then non-resident homebuyers (who in Vancouver consume 8.2 percent of housing stock) will crowd out residents. But if cities build enough housing to account for foreign buyers, they help temper the competition. The question, again, is whether cities want to allow enough housing to meet all these different demands.
Right now, North America’s hottest cities aren’t doing that. The ones with the most visible foreign speculation issues -- New York City, San Francisco, Vancouver -- all have low vacancy rates and minimal new permits. In Vancouver, the rental vacancy rate is now below 1 percent. If these cities permitted more housing, they would reduce the competition that foreign speculators impose on traditional homebuyers. And they would lessen the incentive for speculation in the first place.