Wednesday, July 26, 2017

Housing: Part 245 - Foreign buyers

There is a lot going on in this New York Times post "When the (Empty) Apartment Next Door Is Owned by an Oligarch".

This struck me:
Anger at who is causing that harm can stray uncomfortably close to xenophobia. But politicians and anxious residents often add that their real grievance is with foreign money, not foreigners. And maintaining that distinction is important if cities that have long prided themselves on being cosmopolitan want to continue embracing immigration while curbing speculation. 
This really is a window into our time.  At a time when so many forms of prejudice are becoming cardinal sins, all is forgiven if prejudice can be framed in terms of money.  Since this is the case, it is striking how explicit and unapologetic prejudice in these terms is stated.  Here, we can see it stated in the positive.  "We're not engaging in the cardinal sin of prejudice against foreigners.  We're engaging in the acceptable prejudice against money."

This prejudice has infected the humanities.  An example I noticed a while back was in a review of the book "Empire of Cotton: A Global History", where the reviewer wrote:
Less than a decade ago, a historian interested in the rise of capitalism would have a difficult time finding a job in a history department. The closest thing scholars wrote about capitalism was called labor history, the story of the working class. Almost no one bothered writing about the flip side, elite capitalists; to do so suggested sympathy for the enemy.
Imagine being so blind to your own prejudices that you would say such a thing - as a historian, no less.  (Of course, none of us is immune to this, and we are all most ignorant of our personal prejudices where they are the strongest.)  It is understandable, given the statement above, that something like Nancy MacLean's "Democracy in Chains" could be published.  I'm sure she felt quite justified and professional while she was writing.  Tyler Cowen has said the use of villains in our narratives about the world lowers our IQ by 10 points or more.  This is an understatement.  It saddens me to think of the potential insights about economic history that are missed because the academy has become so blinded by this sort of Marxian sectarianism.

The tone of books like MacLean's, or of others like Naomi Klein, remind me of my youth when certain evangelical preachers would write or give sermons about how, say, Dungeons & Dragons was a tool of Satan.  Their description of the supposed vice was so tainted by their fundamentalism that it was humorous to anyone with a passing familiarity of it.  It is similar with Klein's and MacLean's work for anyone with a passing familiarity of Milton Friedman or James Buchanan.  In Klein and MacLean's case, it's a little less funny because they are attacking actual people, both soon after their deaths, who whether one agreed with them or not, were clearly engaged in a sincere attempt to make the world a broadly better place to live.

In any case, these works are so fevered, and so defined by their propagandist techniques, that, as with those sermons about D & D, they leave the realm of criticism or argumentation.  There is little chance that their authors will adjust to reasoned criticism.

The universality of this prejudice is really at the heart of our self-destructive policy choices during the housing boom and bust.  Money was to blame.  Hunting season was on.  The Wall Street Journal could literally ask for a financial panic with no sense of shame.  Across the political spectrum in 2007 and 2008, the only acceptable position to hold was that somehow markets needed to be stabilized without stabilizing the financial positions of speculators and lenders.  Even after the series of panics and collapses, public officials have to pepper their memoirs with apologies about "bailouts" and self-defense along the lines of, "Ya gotta believe me.  We stabilized financial markets because we had to, not because we wanted to."

In Geithner's memoir, he says,“Nothing we did during the financial crisis was motivated by sympathy for the banks or the bankers. Our only priority was limiting the damage to ordinary Americans and people around the world.”  And, Geithner is considered to be among the more aggressive policy makers regarding stability.

Think of how bizarre this is.  Imagine describing your policymaking approach regarding any other group by insisting - in your defense - that you had no sympathy.  "No, really, you shouldn't be so critical of me!  I'm a good guy, just like you.  I don't have sympathy, you see!"  I am especially sensitive to this because when I looked at the evidence, I concluded the unthinkable - that "money" in a broad sense, really had little to do with the housing boom.  Once I came to that conclusion, all of the sanguine attitudes about collapsing home equity and failing investment banks, all of the explicit demands for "Wall Street" to suffer for their sins, have become shocking.  Is it really that different than, say, being sanguine about the AIDS epidemic because it arose from "sinful" behavior?  I suspect many readers will blanch at that comparison.  How dare I compare a prejudice that is a cardinal sin to an acceptable prejudice?

One prejudice might have slowed the development of a cure.  The other prejudice might have led to a generation defining financial crisis and recession.  If you can see the fingerprints of prejudice in one, you should be able to see it in the other.  If your response to that is, "The difference is that Wall Street really did cause the recession because of the sin of greed." are you sure that your conclusion is independent of your prejudice?  Don't take this as an attempt to sway you.  I realize this would be counterproductive.  You don't win people over to a point of view by calling them prejudiced.


Back to the issue of foreign buyers, the post mentions a paper that tries to model the effects of non-resident real estate buyers.  The authors estimate that out-of-town buyers in New York City have increased New York home prices by a whopping 1.1%.

The post suggests a tax on foreign buyers, as has been implemented in Vancouver, which might seem harmless enough.  We might be able to agree that the priority in housing policy should be to provide residential units over vacation homes or second homes.  I would agree that this would be far from the worst policy we have implemented in housing markets.

But, I think this is a good example of the depth of the problem of unintended consequences.  Let me preface this by saying that there are many cities that have many foreign buyers and that don't have a problem with out of control prices - places like Houston and Dallas - and they don't have to tax foreign investors.  They manage to build some blanking houses to meet demand.  Crazy, I know.

But, I think this unnecessary housing bust is really damaging because a housing boom is actually one of the more effective ways to deal with the demographic bulge.  The problem with the coming bulge of retirees is that, in any given period, most of what we consume must be produced.  If a large proportion of the population is out of the labor force, then there are many more consumers than there are producers.  You can't solve much of that problem by saving in preparation.  Whatever you do, when the time comes, you're still going to have "x" people vying for "y" consumption goods.

Housing is one very effective way to shift consumption over time because, as consumed, it is almost purely capital.  It doesn't have to be produced in the same period that it is consumed - in fact very little of it is.  That means that secular shifts in construction employment could really help to smooth consumption as baby boomers retire.  A lot of homes can be built now, when boomers are still in the labor force, and consumed later when boomers are retired.  Some of that macro-level consumption smoothing might even come in the form of multiple properties - homes that are vacation homes or second homes today, but that could become primary residences in 30 years when retired boomers lead workers to shift to consumption goods instead of durable goods.  The household today with a vacation home may be indirectly helping workers in 30 years to maintain a stable amount of consumption.

Prices are information, and so things like interest rates naturally feed these sorts of self moderating trends in a way that we can't really ever fully appreciate.  So, while we have been in a housing depression for a decade, one could argue that in an unencumbered economy, we would naturally be building too many houses - and that would be a good thing.  Unfortunately, in finance, we can play God.  We have the apparatus in place, and we have given ourselves broad moral authority to impose our will.  We will not be enjoying a housing boom any time in the near future.  We will make sure of it.


  1. That study on New York house prices is a laugher.

    The authors state:

    "The major cities of the world have attracted a flurry of out-of-town (OOT) home buyers. Such capital inflows affect housing affordability, the spatial distribution of residents, construction, labor income, wealth, and ultimately welfare."

    Then they say NYC house prices are up 1.1% due to out of town buyers.

    Huh? 1.1%? Affordability? In the real world, 1,1% is called "within a measurement error" Or even, "Really, no change in house prices in NYC due to foreign demand was detectable…(by our methodology)."


    I guess disliking the wealthy is the last viable prejudice.

    "I hate poor people" does not really fly.

    I understand some of the bias against the rich (especially if I was Russian: From what I read, those guys are thug-kleptocrats).

    Money and free markets tend to dissolve families, cultures, neighborhoods, communities, nationalism, the social fabric. Probably, this liberating, and that's why most people go for it---to a point.

    But resentments can be created.

    If the "rules of the game" are perceived to be rigged amid declining wages and rising housing costs, I would guess resentments would be magnified.

  2. Obviously difficult to isolate the various impacts...but London real estate fell quite a bit upon the Brexit vote. I suspect the "1%" is far too low as it does not allow for contagion effects of capital flight. As a multi-decade market observer i'd say it's closer to 5% in NY.

    1. OK. Still a pimple on the elephant, and not the root cause of the problem.

    2. Or, put another way, there appears to be as much foreign buying in Texas as there is in New York. What effect does it have on prices in Texas? Thinking of it this way, if we did a regression of the cross section across cities of the price effect of foreign buying against the amount of foreign buying, wouldn't the correlation be negligible?

  3. More pondering on the NY story;

    Seems to me there is a modern-day tradition in economics, and it goes like this: We believe in supply and demand, unless we find an empirical study that confirms a bias, in which case we believe in the empirical study.

    So we have left-wingy types conducting studies that find higher minimum wages in Seattle do not reduce demand for labor. The demand for labor is inelastic.

    The NY house-price study posits demand for real estate is totally elastic: A boost in foreign demand only raises prices 1.1% (egads, a wiggle in, say, the non-measurable quality of units sold, but let that go).

    In effect, the NY authors contend demand for real estate is perfectly elastic, and prices even 1% above what they would have been without foreign demand result (I guess) in domestic buyers sloping off from the market to bring prices back to "normal" or what they would be without any foreign demand.

    Of course, there are other empirical studies that find strong correlations between national current account deficits, foreign inflows of capital and national house-price appreciation. This makes sense from a supply and demand perspective. More capital chasing a restricted supply. Ergo, higher prices.

    Germany and Japan have no housing bubbles. I do not know Germany, but Japan has looser zoning and bullet trains into Tokyo.

    Perhaps Tokyo is a trifecta of anti-housing bubble traits: Modest trade surpluses, looser zoning and mass transit. Notice monetary policy is a minor figure on a crowded stage.

    China has bubbles in cities with tight zoning and inflows of capital, though the inflows are created by huge exports. Call it the Detroit model of the 1960s, when some exclusive neighborhoods in Detroit appreciated.

    As an aside, I commented on Mark Perry's blog that all the minimum wage studies on Seattle have a drawback, and that is that Seattle property zoning is radically raising retail space and house prices. So there is upscaling of people and enterprises in Seattle, who can afford the rent. We might expect both higher employment and wages In Seattle under such a situation. Which actually fits the data pretty well.

    My comment was deleted.

    So, I praise Kevin Erdmann. He is willing to ponder property zoning as an macroeconomic force, and tolerate viewpoints of wayward wags.

    Onward Kevin Erdmann!

    Add on: I have not looked at the NY study. I will say there is tremendous pressure in "open-minded" or academic circles to avoid any whiff of xenophobia, or any hint that trade deficits could have negative ramifications. Not PC! Now that Trump has uglied up the debate, to raise questions about gigantic trade deficits is to be a Neanderthal. So the NY authors may have felt pressure to come to a conclusion that foreigners buying NYC real estate has no negative results.

    Add on #2: "Closed access cities." Okay, shoot me, but "closed access cities" are only closed to people, and primarily new wanna-be residents, not to capital or most employers. That is, cities will build office towers, and generally embrace built-space retail for the consequent sales taxes.

    I would call some cities "closed access for wanna-be residents, generally open for built-space retailers and employers, and wide-open for capital."

    1. Housing demand is elastic! At the height of the housing bubble, about 2% of homeowners were migrating away from Closed Access cities each year, yet prices were rising by double digits. Then, the migration stopped and prices fell. Why should Closed Access prices react any more to foreign buying than they did to domestic buying?

      Prices went up because instrinsic values were high.

      Now, maybe there is some effect. Maybe loose lending terms was the source of the bubble prices, so in 2005 it was something like, intrinsic value added 10%, loose lending added 10%, domestic outmigration deducted 10% and foreign inmigration added 2%. But, good luck figuring that out, and foreign influence seems pretty clearly to be the smallest issue there. Consider, at the height of the bubble, NET domestic outmigration of homeowners probably accounted for more than a quarter of all home sales in Closed Access cities. Net foreign buying couldn't be close to that.

  4. Kevin:

    You raise good points, and yet the studies I have cited from the Fed and elsewhere do find strong correlations between national trade deficits and house-price bubbles. I guess it is a dead-end argument for both of us.

    I could posit that foreign capital, as opposed to people, is entering closed access cities, and driving up prices, so you would not see that in immigration patterns.

    In L.A. this is happening---the JVs or corporations I have mentioned, which are domestic-based but foreign funded---but how big this is I do not know.

    Anyway, I completely agree, there cannot be a "bubble" in real estate without a restriction in supply.

    "Yes, I am a supply-sider; I want to eliminate property-zoning."

    Framed that way, the supply-side movement withers quickly.

  5. "Muh free trade! Muh free markets!" screeches the libertarian as he outsources your job to the lowest bidder in a 3rd world country, all so the corrupt owner of the 3rd world slave labor can turn around and execute a foreign purchase of that starter home you had your eye on for 40% above a reasonable value, effectively pricing out the middle class families that actually live in the area. So now that middle class family is down to one income, perpetually rents because owning is out of reach, is atomized from neighbors and society because of transient globalism and foreign cash storage in homes rendering "neighborhoods" an anachronism, and the sole breadwinner in the family has to drive 75min each way in soul crushing traffic to get to a job that will soon be outsourced as well. Thanks globalism! But at least no one can call you a xenophobic bigot!

    It's laughable that people continue to think humans are simply fungible economic entities and that social cohesion, knowing your neighbors, societal trust, shared values, etc. mean absolutely nothing. But hey, let's keep the foreign money flowing and screw the next generation of actual Americans who live here! Muh GDP is what REALLY matters.

    I love it when I tell this to MIT educated economists and all they can do is sputter and twitch before scurrying off to the new upscale Chinese restaurant that just opened up in Cambridge (the fruits of wonderful globalism). "Hey, I got mine, so who cares abt those proles who aren't smart enough to get a degree from MIT as well!"

    1. I feel you, CB. The main focus of this blog has become finding a solution to those problems - finding ways for working class families to own homes and to live in the cities that they choose and that provide them with economic and cultural opportunities.
      Most of these problems have come about because of the unintended consequences of a multitude of rules that say "you can't" do one thing or another. I have outlined extensively how we can solve your problems with "you can" answers. "We can't" keep making this mistake if you want your city back.