Foreigner Bashing?

There’s been a lot of coverage of gentrification and foreign property ownership in the Guardian in the last few days. Oliver Wainwright disguises a call for a land value tax as a piece on gentrification.  There’s also a fascinating piece focussing on Chinese capital flows to the UK residential market.  Cities like Vancouver, Sydney, Melbourne and Brisbane have imposed additional transaction taxes on foreign buyers The fact that the Mayor of London is commissioning research on foreign investment in residential property in London has got major coverage in the Guardian too. It will be interesting to see what the research comes up with.

I suspect it’ll be a hard to robustly isolate the effects of foreign buyers on property prices. It strongly echoes the ‘holiday home’ controversy in rural and/or tourist areas as well as the claim that migrants are creating housing shortages.  Is this just another manifestation of the increasing propensity to blame foreigners for socio-economic woes?  Or is it a genuine consequence of globalized capital flows being channelled to a relatively small number of areas in a relatively small number of cities with major overspill effects on their housing markets? If the latter, there are a lot of winners too – construction firms, agents, land owners etc. as well as losers.  Do the costs outweigh the benefits?  Just describing – nevermind measuring – the costs and benefits, winners and losers etc.  is likely to be challenging.

With a colleague, Anupam Nanda, I’ve done some work on this area in the commercial sector. It’s amusing when you hear UK investors complain about US investors buying at stupid yields in London and then hear US investors complain about UK investors buying at crazy cap rates in New York and Boston.  In the commercial sector, there’s been an element of ‘swapping’ going on as investors diversify overseas.  This is coinciding with asset price increases across most sectors driven by – let’s be controversial and call it – the bond bubble.

The empirical evidence on the impact of foreign investors in the equity markets has been surprisingly sparse. Broadly, it suggests that foreign investors tend to focus on large, ‘recognised’ stocks and that there is a positive effect of foreign investment on share prices. But the research is far from convincing on the effects on prices.

Our results were consistent with small negative effects on yields which, in turn has small positive effects on prices. However we’re nervous about the difficulties of controlling for – sorry about this – endogeneity.  It’s difficult to be sure in these types of studies what is causing what.  Are price rises attracting foreign capital?  Or is foreign capital causing price rises?  Is foreign capital attracted to mature, transparent markets?  Or is the market activity created by foreign capital making markets more mature and transparent?  There’s seems to be lots of feedback relationships going on and some bi-directional causality.  There are then significant problems in identifying what would have happened to prices and supply if there had been no/fewer/more highly taxed foreign investors – the counterfactual is tricky.  There’s actually some recent academic research here and here focussed on New York and London that finds “long-lasting but temporary” effects!  In development markets. would the same amount of supply occur if there were fewer foreign investors?  Who would be the marginal investor for existing and new flats – domestic buy-to-let investors?  Looking forward to the research findings.

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