The Washington PostDemocracy Dies in Darkness

Foreign investors are making housing more expensive. Should we tax them for it?

New York City's Brooklyn,with the Manhattan skyline in the distance. (AP Photo/Mark Lennihan, File)
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James Surowiecki has a column in the New Yorker that makes a number of interesting points about our increasingly international real estate market -- a trend powered by the super wealthy with real consequences for the rest of us.

For starters, this pattern no longer simply covers rich oligarchs buying second (or third or fourth) homes in Paris or Manhattan. Increasingly, the wealthy in Latin America are buying homes in Miami. Canadians are buying homes in, of all places, Arizona. Seemingly everyone but Londoners is buying a home in London -- and then leaving it empty. And the Chinese are flocking to Vancouver (or, at least, their money is). As a surprising result, Surowiecki writes, Canadian officials now believe that "Vancouver’s real-estate market is tightly connected to what happens in the Chinese economy."

Now, all of this is good for once-flagging housing markets in places like Miami, and for the homeowners who will watch the value of their own properties rise with the influx of foreign investment. The trend also tells us some interesting things about the foreigners who are looking to buy: For many of them, property in Vancouver or Seattle is a safer place to put money than property at home. It's even possible to envision climate change accelerating this trend, as markets beyond the reach of rising seas become more internationally attractive, too.

But all of this also means that real estate markets are becoming disconnected from the economic reality of people who already live in these cities. Writes Surowiecki:

The globalization of real estate upends some of our basic assumptions about housing prices. We expect them to reflect local fundamentals — above all, how much people earn. In a truly global market, that may not be the case. If there are enough rich people in China who want property in Vancouver, prices can float out of reach of the people who actually live and work there. So just because prices look out of whack doesn’t necessarily mean there’s a bubble. Instead, wealthy foreigners are rationally overpaying, in order to protect themselves against risk at home. And the possibility of losing a little money if prices subside won’t deter them.

In effect, this means that absentee homeowners can price out people who are actually living in the area. It means that empty housing can drive up the cost of occupied housing (this parallels a concern about investors who would buy up housing to turn it into short-term rentals on platforms like Airbnb). It means that cities may be short on housing that locals can afford even as a non-trivial share of their housing sits vacant. From there, the economic consequences ripple out: Empty homes are good business for security firms; they're bad business for nearby retailers who rely on actual people to buy their goods and services.

So, what's the solution to this new reality, if we want to keep neighborhoods occupied and cities affordable for the people who have jobs there? Writer Kyle Chayka at Pacific Standard has proposed an updated take on rent control: residency requirements. Make people occupy (or rent out) the housing they own. Urban Planner Andy Yan suggests to Surowiecki a less draconian idea: Make foreigners pay a premium to buy up local housing.

Taxing them for the privilege -- beyond existing property taxes -- probably won’t deter foreigners who have a lot of money to shell out in the first place (any more than higher taxes on the rich will really drive them out of places like Manhattan). But maybe that revenue could be spent mitigating some of the consequences of international investment. What if cities used that money to create new affordable or moderate-income housing, as communities in London are considering? Or to help pay for a proposal like Mayor Bill de Blasio's $41 billion plan to ensure 200,000 affordable-housing units in New York? Or to support programs and infrastructure that benefit the residents who do live in town?

Cities already require such concessions of real estate developers, who have to fund public parks, affordable housing or new school construction in exchange for the right to develop a project. What would happen if we thought in similar terms about the investors who later come in to buy that finished real estate?