Foreign purchases of American homes plunge as Chinese buyers flee the market
cnbc.com
cnbc.com
A company buying thousands of homes and then milking workers through rent for decades seems unethical.
While I do not have a solution, I think this is an issue we should work on
The problem with this in the UK was that the stock of council housing became immensely valuable and as soon as we had a right wing government they started to sell it off. Selling it off created home owners (who are more likely to vote for that government) and raised "free" money which could be given out in tax cuts, so it was a natural target.
In the UK an alternate system - housing associations (HA) - survived a little bit better. Here the houses are either built with public money and handed to a housing association (a private trust) or built by the HA. The HA then rents them out on similar terms to council houses. Because they aren't publicly owned the government couldn't sell them off. Except that because some HAs built using government loans or assistance the government was able to extend the right of tenants to buy to those homes too.
This takes away the incentive to sell off public goods for their own short term profit.
If anything, rents indicate true cost compared to mortgage costs which can accurately signal for more (or less) construction needed. In the US, ownership costs are masked by subsidizing interest rates, loan repayment periods, down payment amounts, and mortgage interest tax deductions. Also, property tax limits subsidize existing owners.
There is a bit of a conflict in the mechanics of democracy with zoning laws and taxes, with existing owners having an incentive to limit supply, especially in booming markets. It’s a very tough problem to solve, but making clear the costs of all the subsidies would help.
Not the other way around.
The real problem is that zoning is decided at the local level; local turnout is not very high, so it doesn’t take that many concerned homeowners to overthrow someone who is too pro-growth. And usually local municipalities are balkanized subsets of the region, who want all the upside of regional growth but none of the downside. In the most extreme example, the Bay Area, this leads to lots of permits for job expansion in small localities but not for housing, since residents need a lot more in the way of services.
It would be much more healthy to have zoning laid out at the state or regional level, but regional level governments don’t even really exist in the American context, and only a few cities in America have continued annexing suburban areas into the 21st century.
Hence removing the subsidies or at least making explicit the cost of subsidies, so people are incentivized to go out and vote for increases in supply. Another option is to hand over ownership to government and make everyone do land leases to make them participate in the market and therefore vote the “right” way. Not a perfect solution of course.
Not just zoning, soooooo much shit would be better done at the regional level because it would allow the urban areas to do what they think is best for them without pissing off the rural areas (or needing their approval) and vise versa.
This is why the Land Value Tax is such an effective solution to this problem. It's fair, economically efficient and reduces inequality:
There’s really not. All extant democracies recognize private property, with certain limits for the public interest. Zoning is an extreme imposition on private property rights, of a sort that ordinarily would only be consciences in light of equally compelling public interests. Unfortunately, we had a few bad Supreme Court decisions at the height of white panic about desegregation that normalized such impositions. You’d hesitate greatly before taxing someone half the value of their property, but local governments think nothing of eliminating half the value (or more) of private property through zoning or historical preservation ordinances.
The only places with no protections were medieval societies and their resultant immense inequality.
There was very little urban home ownership until twentieth century incentives and regulation directly changed that. Efforts made by people like FDR, William Beveridge and influenced by Keynes who would all be called vociferously denounced as socialist today.
So unless we want to return to that historic lack of home ownership, those are the kinds of policies needed. This because the eventual outcome of an uncontrolled hosing market is as problematic as an uncontrolled market is to climate.
Providing homes for rent is a service provided to people that they can pay for if they want to make use of it. An economic transaction involves an exchange for money. It is not milking someone. Is a grocery store milking you for food you buy?
A house has value. The people who built it had to feed themselves and their families. Land has value. It is not free. I have to pay expensive annual property taxes to maintain ownership. The services a bank provides are not free. Living expenses are a real thing and even if you can't afford it then someone else is going to have to pay for your housing.
And if you derive any rental income from the land value whatsoever, you are milking money from something valuable you did not create and did not make valuable. It's a purely parasitic form of value extraction from something that isn't free.
This is why the value of land improvements (e.g. having a nice house) should be untaxed, separated from the value of the land while the rental value of the land should be taxed at 100%.
And, until we do do that, we shouldn't pretend that rent isn't largely (i.e. ~60%) parasitic value extraction.
Then consider the "value" of an empty lot, the archetype of land in itself. Its _price_ is based solely on the the _value_ that those near it produce. A high productivity region increases the value of neighboring empty lots. The lots themselves have produced nothing and whatever price they command is solely a drain on the productive part of the economy.
>Is a grocery store milking you for food you buy?
Value added by building or improving a resource like food or a structure is fundamentally different and obviously needs to be compensated and encouraged. But profit from an unchanged property is entirely a zero-sum gain moving wealth from productive parts of an economy to unproductive.
monthy rent = 0.3(minumum hourly wage * 160 hours) * n bedrooms; with studios being n = 0.5
That way if landlords want to lobby for higher profit margins, the only way to do it would be to also ensure the working class can actually afford to supply those higher profit margins for the landlords.
Preventing people from making money by investing in real estate just means housing shortages are less effectively filled.
That's essentially what rent control does, and economists are almost unanimous about the harm it has done to housing affordability:
I rented in a larger city last year. Had I bought instead of renting I would have had transaction costs that would be 3x the amount I paid in rent. Not only that, if something broke in the apartment I had someone I could call to take care of it. I didn't even have to think through the logistics of getting contractors to my apt and getting bids on jobs.
Not all landlords are slumlords.
The real estate agent wants between 2% and 3% of the actual value of the building from both the seller and the buyer.
Taxes (unless it is a "first house" designed and actually used as your "primary residence" AND provided that you are not going to resell it within 5 years, in which case will be around 2% of nominal value) will be around 9% of nominal value (usually much lower than market value). Then there is the notary fees.
So, example, you buy an apartment paying it 200,000 Euro, something that would be rented between 600 and 800 Euro/month (if you are lucky):
Estate agent (buying) 6,000 (0.03x200,000)
Taxes (buying) 10,800 (0.09x120,000)
Notary 2,000
Estate agent (re-selling) 6,000 (0.03x200,000)
That is 24,800 Euro to which you add the equivalent of 1 year land tax probably some 800 Euro, and some repairs/refurbishing making it more than 26,000 Euro (and without considering what the 226,000 Euro could have produced if invested).
Compare this with 12x800=9600
Maybe it is not exactly 3x, but it is at least 2.5x.
If you prefer, unless there is a huge increase in house value in the (short) period of ownership, the breaking even point is past more than three years.
I am not following you, in the example I posted there is no "lawyer" (corrupt or belonging to a cartel or not) involved (as normally there are no lawyers involved in "normal" real estate transactions).
What I posted ar only usual fees and taxes.
https://www.brickunderground.com/blog/2015/03/closing_costs
So the cost to buy/sell a $1mm apartment could be in the range of $110,000 after broker fees and all taxes are accounted for. An apartment at that price would rent for maybe $4k for month, though that will rise at a faster price over 30 years than a fixed mortgage + common charges. Unless the value rises at a pace much faster than the rate of inflation, you're going to lose money if you don't hold on to the place for a few years. See this fun calculator to find the inflection point:
https://www.nytimes.com/interactive/2014/upshot/buy-rent-cal...
So if all the landlords costs do not rise all that much, why do they feel justified to raise rents sometimes well over 10% a year? The only reason is to fatten the wallet by milking the tenants, and we've hit a point where in some cases the working class has to commute 4 hours a day in desperate effort to find a job that pays the exorbitant rent.
'Foreigners who have studied or worked in China for a minimum of one year are permitted to buy property. ... Unfortunately, a foreigner can only own one property and it has to be residential. Again, the foreigners are banned from renting the property as you are supposed to use it for dwelling purposes.'
There is so much draconian regulations of foreign bank account holding all around the world, but none regulating foreign possessions of the said bank. Same for real estate.
I would suspect that US markets are less to blame than foreign economies showing signs of contracting. In any case, it's good for American's.
It's insane to me that our ability to buy homes is so adversely affected by foreign investment.
Also the fact that people can leverage a home purchase 5-to-1. If mortgages weren't a financial instrument, few could afford today's prices. I won't go into detail here, since the chances of mortgages going away is near-zero, but the possibility of zoning changes is somewhat reasonably possible.
Housing Shortage After WWII (aprox. 1945-1955) 30 years latter another housing bubble (aprox. 1980s) 30 years after that another housing bubble (aprox. 2010s)
Incidentally Trump is a good reflection of America. His father made a fortune in the post war housing bubble, Trump is the face of the 80s housing bubble, and now he's back again for this housing bubble.
Homes generate cashflows (rents). Rents are a function of local economy (paychecks). What one is willing to pay for a home is a function of rents, risks, interest rates and expected changes in rents, risks and interest rates.
If home prices are not detached from these fundamentals (and is there evidence that they are?), some investor is going to buy them, foreign or local.
To these investors, the fundamentals of the housing market don't apply as rigidly.
https://www.theatlantic.com/magazine/archive/2019/03/how-kle...
This is not in any way about the cost of housing in the US. The US real estate market has virtually no impact on capital flight from other nations.
The article completely misses the point, for understandable reasons: this is a domestic Chinese fiscal and political issue, as perceived by CNBC's Real Estate Correspondent.
What we're seeing is the effect of the latest step in tightening capital controls by Beijing, designed to reduce capital flight, something which they've been actively trying to limit, and publicly so, for at least the last three years. The paid lip service to the single biggest factor.
People engaging in capital flight don't care all that much about market prices. Paying more than the value of something is acceptable if the alternative is losing everything. Buying a home and leaving it empty is not a problem. Using it to get in-state tuition so your kid can get a western education is better, but not necessary.
Money laundering fronts will give up profit margin that would be unthinkable in a legitimate business, all in order to turn some portion of ill-gotten gains into something that can be more safely used.
The reason Chinese nationals are buying fewer American homes has nothing to do with America, and everything to do with China. The current American political climate has nothing to do with it, either, unless one's considering America's stability and the international status of the US Dollar (both of which are the surest respective bets on the planet), the two things that make it such an attractive destination for capital flight. It's also an economy in which one can put that capital to good use without much difficulty (relatively speaking).
Beijing swings back and forth between opening up their capital markets, and maintaining domestic stability. That's all this is.
* the good (the house) does not leave the country
* the money continues to flow after the actual sale: real estate taxes and maintenance
* taxes go to the local government, but the non-resident buyer does not really consume government services, so that benefits the rest of the local population
* maintenance go to the local economy
* when the rich foreigner visits, they spend like a tourist, not like a local, i.e. they contribute to the local economy disproportionately compared to their actual presence
Why do rich Chinese buy in Manhattan? Why not in Lagos, such as this wonderful house [1] that goes for $1MM ? Because of the rule of law. Real estate sales to foreign investors is actually export of the rule of law. The rule of law is simply a more valuable asset in Manhattan than in Lagos, or in Beijing for that matter.
Impeding real estate sales to foreigners simply means obstructing the monetization of maybe the most valuable asset that the Western world has. (or maybe the second most valuable)
[1] https://www.nigeriapropertycentre.com/for-sale/houses/block-...
Literally the whole point of doing it.
The non-resident might not spend any money on goods or services in the municipality resulting in less tax revenue for the city/state. Especially bad if they don't even rent it out to anyone.
Also interesting is the average price for each property dropped from last year to this year (from 450 to 425).
Dunno what any of that really implies but thought it was interesting.
This indicates to me that these foreign buyers are not necessarily institutional investors or companies, but foreign citizens, so the segment of the market they're in is probably not the multi-million property segment, but the more "standard" residential properties market a normal US resident would be in. The article does somewhat confirm this:
>"Foreign buyers include those living in the U.S. and overseas, but the majority (60%) were recent immigrants and foreigners who live in the U.S. for work, school or other reasons."
If you also take into account that there is an effect of the purchases made by these buyers on the "median price for all buyers" cited above (and so the real difference in median prices between foreign/domestic buyers is higher than what is suggested by those figures), I think the effect is somewhat diminished (as this pushes them into a more "upscale" market).
Even with the above, I still think it's relatively safe to assume this will have a downwards impact on US residential prices, at least in these states (but I'd need precise figures as to what share of homebuyers are foreign).
*edited the last paragraphs to correct something I had gotten mixed-up on
Imagine having to get a visa to go to a home you own?
Citizenship is an outdated concept, and not one I really agree with.
Citizenship, though, is a critical concept for how countries function. It has a bearing on taxes, benefits, voting, etc.
Without citizenship every one of those are up for massive abuse.
Calling citizenship outdated is a fashionable idea for the class of people who can cherry pick their prefered work-, investment- and tax environment.
In the old days an individual would have some sort of responsibility towards the community, including the effect of house ownership as described by OP. Another outdated concept?
On one hand maybe this combined with the tax changes will result in housing price stabilization.
However given how much of the economy is tied to FIRE, it could have significant external impacts.
The simplest reason i can think of is due to tariffs rmb lost value compared to us, making us housing tad bit more expensive. But housing market has dropped a bit to make up for it.
I am not fully convinced.
Reasonable (but in this particular case unfounded) cynicality?
2. Given the finite nature of real estate, especially in metro areas, (vacant) investment property harms the residents
Counterpoint: at least in AZ there is a tax for foreign buyers.
One could argue the same applies to investment properties by Americans who do not live in those communities, but it seems like an acceptable line to draw I suppose.
But now imagine they arrive with cool cancer curing technology and want trade it for some real estate. The deal is not so bad, is it?
Of course you save on a mortgage, in LA you profit on nearly every mortgage no matter what. But that benefit is limited to the class of people who can afford to put money down, and that class is a minority in CA.
Plus since the crisis the banks will only lend with 20% deposit, plus 10% taxes - so you need a 30% downpayment.
Given a flat will cost you around 180k euros you can see why home ownership is in decline, because no-one has 60k euros lying around when the average tech salary is 30-40k euros and the average normal salary around 20k.
We see this with the large investment banks and internet companies. Before this, we saw this with the large manufacturers. Believe it or not, cars used to actually be manufactured in Detroit city limits. Baltimore was full of canneries, etc.
I'll be the first to admit it sucks, and I don't feel like moving ---I selfishly want other people to move. I also selfishly want other people to buy condos so I can live in a single family house. But life is full of such tradeoffs for those making less than the top 99% or so of their region's income.
Also rent is becoming an ever larger expense in almost everyone's budget. I have a feeling we are playing the "market can remain irrational longer than an individual can remain solvent" game yet again, especially propped up by low rates of borrowing that's going to explode in our face yet again.
Sure, the software engineers move into the apartment and the janitors move out, but you still need janitors, you still need service workers, you still need these low wage jobs to actually make a city function.
So now the janitor moves to a place that's 2 hours away and still needs that job where he used to live, so he buys a dirt cheap car and commutes from where it is affordable (which doesn't have any jobs for him) to where he works.
Roads get clogged, road maintenance costs increase, pollution increases, the costs to repair things increases because you gotta pay people more to spend more time getting to the job site, services are hindered, goods deliveries are hindered because now everyone is spread out across a 500mi suburban area instead of being close together in a dense and sustainable urban area, and we end up with the LA we see today: a hellhole for the working class, but a boon for the few people with capital to grow.
There is a limit for lateral growth and it's already been reached in LA in the 40s. They built highways which were a temporary reprieve for the traffic, but now those are clogged as badly as the avenues were in the 40s (and still are today). It's been time for vertical growth and transit, which is how much of the city was originally planned, with a vast interurban rail network spanning the entire basin and the valleys that made the NYC subway seem paltry.
There's no difference between somebody 3000 miles away in the US owning property and renting it out and somebody in China owning that property and renting it out. The problem is housing stock being underused, but that (a) can be addressed via taxation and (b) is no different from stuff like empty nesters keeping their 4 bedroom house after the kids move away.
To the person living at the other end of the world you're just a source of income.
The concept of restaurants must really blow your mind.
Even if you don't want to, _somebody_ will, so you're a chump if you don't.
The solution here is to fix the system allowing it (after all, the above logic could apply to slavery just as easily). For starters, break up the housing cartels, also known as "community planning boards".
Unless you want to go back to a world where some percentage of people die from lack of shelter of the rich can make massive profits it might take a little rethinking of your position.
You just need to invest $500k.
-- People on H1B visas -- People here as students. Okay, they'd have to have rich parents, but some times it makes economic sense -- Other people here for the long term but not necessarily having green cards (people here as refugees, for example).
House owners should be happy enough to have the real estate goes straight up those many years. There is an end to it, they need to accept that.
In short, happy after all.
I would prefer lower prices but am not sure it will be happy for all.
The worst-case scenario in that case is "overbuilding," a deceptive term that means that housing becomes affordable again to those who need it, e.g. minorities previously subjected to redlining.
Do we have similar problems with food, clothing, cars, and other goods?
Still somewhat fresh in memory are NAR economist Lawrence Yun's bizarre rationalizations in the runup to the 2008-09 GFC.
What was it? Like 36% decrease in foreign buying overall? China specifically was like a 60% decrease?
I'm not an expert or anything, so what I think means exactly jack. Having mentioned that, those decreases seem to me to be far in excess of anything that could be reasonably explained by economic factors alone. Something must be going on.
"Fleeing" seems like a legitimate label for it.
Fleeing implies they have a choice and are choosing to leave because of poor prospects in US housing. That might be true. But the choice might be involuntary or be due to sharply rising prospects in China or elsewhere. If China those capital controls are significant, maybe a better title is "Chinese purchasers dragged away from US housing kicking, screaming and cursing their own government". That is a possible interpretation based on what is included in the article.
Principal Component Analysis is really difficult to do on a live economy because no one is omniscient and policies/events enter and go in a less than ideal simultaneity.
I mean, the Canadians don't have currency controls. Neither do the Mexicans. All three of the Big Three foreign real estate buyers have pulled back in a material fashion this year.
Like I said, I just think something must be going on here. I don't think this can be waved off as "Well, it's just China."
"Hispanics are experiencing the largest homeownership gains of any ethnic group in the U.S., a turnaround for the population hardest hit by the housing bust that could help buoy the market for years."
https://www.wsj.com/articles/wave-of-hispanic-buyers-boosts-...
We're talking about foreign buyers.
We mean "Mexican" buyers as in, actual citizens of Mexico.
Not Mexican buyers as in, "That guy has a funny, spanish sounding last name, he must be Mexican."
We're not talking about Hispanic Americans.
China, 2000: 1.2 trillion USD [0]
China, 2017: 12.2 trillion USD [0]
Mexico, 2000: 700 billion USD [1]
Mexico, 2017: 1.15 trillion USD [1]
If GDP is a proxy for wealth, China --over the past ~2 decades-- had way much more potential in investing in foreign real estate. I don't understand why per capita GDP would be more relevant in determining which nation would have more capacity in investing in foreign real estate. That capacity for investment seems independent of how the wealth is divided among a countries citizens.
The rest of your comment makes sense. But this last part doesn't seem right: if wealth were distributed evenly in China, then there might be no Chinese buyers for US real estate. It's only due to inequality ('how the wealth is divided') that there is a segment who can afford this.
Yup, totally agree with this and the overall point you were making in your comments.
People can't afford housing because Chinese are buying up all the houses.
>price goes down
People lose life savings because Chinese are not buying up all the houses.
Zero growth, return on investments bad, need economic stimulation quick
Again I do not agree with either statement even remotely. I haven't done any serious research on the current housing market and dont harbor any feelings or ideas on it.