Wednesday, March 22, 2017

They terk our herms!



We now have a cosmopolitan  version of "They terk er jerbs."  "They terk our herms."  Foreigners apparently have a strange affinity for buying homes only in cities with disastrously low levels of housing starts which leads to home prices well above replacement value.  Strangely, foreigners apparently never want to buy homes in cities with healthy construction markets and high housing starts.  There are never articles about the terrible problem of foreign home buyers in Houston.  Surely, we can't trust people with such bizarre preferences.

The Economist takes note of this phenomenon.  In the face of this trend, how can we possibly manage to create affordable housing for our own people?


18 comments:

  1. Egads. "The Economist" magazine does not even mention the words "property zoning" in an entire article devoted to rising housing prices.

    Actually that is one of my hobby horses: property zoning has become so ubiquitous as to be a macroeconomic phenomenon much more important than, say, minimum wages.

    Yet you will not find property-zoning treated as a macroeconomic topic or ever mentioned in relation to trade deficits.

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  2. Egads. "The Economist" magazine does not even mention the words "property zoning" in an entire article devoted to rising housing prices.

    Actually that is one of my hobby horses: property zoning has become so ubiquitous as to be a macroeconomic phenomenon much more important than, say, minimum wages.

    Yet you will not find property-zoning treated as a macroeconomic topic or ever mentioned in relation to trade deficits.

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  3. "Foreigners apparently have a strange affinity for buying homes only in cities with disastrously low levels of housing starts which leads to home prices well above replacement value."--KE

    You know, this may not be so far from the truth.

    1. Scott Sumner has posited the system of property rights in the "Anglosphere" is comforting to global investors. Makes sense.

    2. You have posited that foreigners prefer low-risk investments in the US---bonds and property are low-risk investments. I certainly would prefer owning a bond or property in a foreign country as opposed to an operating business.

    3. Okay, so foreigners like low-risk property. What is the lowest-risk property? Property in cities where property zoning is restrictive. No new competition!

    4. Add on: US banks will help you buy! Put $2 million down on a $10 million apartment building, and the whole thing is yours!

    In other words, a foreigner who buys an apartment building in West L.A. knows he is secure in his ownership and that new competition is very limited---no new 50-story condo towers erupting on all sides. Like in Houston.

    In fact, foreign capital is pouring into an apartment asset class called "class B apartments." The idea is to buy a class B apartments in a "barrier-to-entry" city, dude it up, and raise the rents. There are US-based company that owned literally tends of thousands of apartment units now doing JVs with foreign investors.

    I find it credible that foreign capital would pour into what you call "limited access cities," or what some investors call "barrier-to-entry" cities, or what I call "anti-free-enterprise property-zoned" cities.


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    1. If I was looking for low risk investments, I'd buy where I didn't have to pay more than the cost to build. I think buying in Tha CA cities is a combination of aspirational workers buying higher wages and status seekers who are buying because it is a limited asset. But I think the price on the margin in the long term is more dependent on the wage seekers.

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  4. Yes, but anyone in L.A. Sydney or London would tell you foreign buyers are rife. Maybe some xenophobia there, but still…people in Vancouver put a 15% tax on foreign buyers. They imagined all those buyers?

    I know foreign buyers are very active in Los Angeles apartment buildings.

    Another unrelated thought:

    https://fred.stlouisfed.org/series/TWEXBPA

    You have pointed out foreign profits from US-based company foreign operations are strong. Of course, if the dollar depreciates, then foreign profits (reported in dollars) do surge.

    The dollar has had a few declines since the 1980s, though recently climbing back. Just a thought.

    Add on on my xenophobia:

    http://fortune.com/2016/12/29/real-estate-trends-2017-2/

    the above link says foreigners like NY LA.

    Like I say, the safest real estate to buy is one in a high-barrier-to-entry city. You buy an apartment building in Dallas, and you may face a glut of apartments in a few years…..

    Florida gets overbuilt. Arizona gets overbuilt. Las Vegas gets overbuilt.

    Coastal California never-ever gets overbuilt. Verily they are giving away condos in San Clemente? Newport Beach?

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    1. There may be a lot of foreign buyers, and cutting them out of the market will have short term negative effects on prices. But, I doubt it has much affect on long term prices. The reason prices in all of those cities are high is because wages are high there. If foreigners bid up the price above the level determined by high wages, more working residents would migrate away because the cost would be too high.

      Absentee owners could have some effect, just like rent control does, by reducing the available quantity of homes at market rates for working locals. But, these cities are 2-4 times the price level of most cities. Very little of that is because of foreign buyers.

      Investing is first and foremost about price. You're not accounting for price in your final point. The overbuilt cities are by far the safer investments.

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  5. Interesting...run a chart on Las Vegas v. L.A. house prices 2000---2017...

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  6. I don't know. I have not run the chart. It may, or may not, show investing in property in a high barrier-to-entry city is less risky than buying in an open-access city.

    I suggest those two cities are they are close to each other.

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  7. http://us.spindices.com/indices/real-estate/sp-corelogic-case-shiller-los-angeles-home-price-nsa-index

    Okay according to Case Shiller, L.A. house prices have nearly fully recovered their 2008 peaks, while L.V. is still down 33%.

    Of course, L.V. may be special, and L.A. may be special.

    But it does seem safer to buy in a high barrier-to-entry market. Just makes sense to me.

    In L.V., as soon as prices look promising, somebody will put up a new condo tower, or flesh out a new housing tract.

    As you have pointed out so many times, housing production in L.A. atrophied under punitive zoning a couple decades back, and never recovered.

    This leads to higher living standards for Vegas people, if their incomes are at all close to L.A…...

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  8. http://marginalrevolution.com/marginalrevolution/2017/03/can-rents-megacities-keep-going-forever.html#comment-159610899

    Egads. Well he takes a feather from your cap, and discusses the dense networks of skilled people etc…you will like that….

    But the words "property zoning" are entirely absent!

    A guy could read the Cowen post and conclude residential construction in "megacities" is on fire, and just can't keep up with soaring demand…..

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  9. Regarding the debate on where to invest, it is certainly the conventional wisdom to buy in high barrier to entry markets. Those markets often have cap rates that are much lower. For that reason, I've always preferred the contrarian play and preferred higher cap rate markets. I doubt there is a definitive way to prove one way is better.

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  10. Bill

    Well if you go here, there are 20 cities, perhaps not a large enough sample. The limited-access cities have recovered all house price losses since 2008, but some of the open cities have not.

    So for this limited sample, for this time period only, 2008-present, if you threw a dart, better at a closed city.

    Dallas is an exception, and done better than the cities I checked open or closed. Maybe you say "oil." Also, New York has still not fully recovered 2008 levels.

    So, probably the real-life answer is something along the lines of, "You are better off buying in a closed-access city...if you have the juice to get property upzoned."

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    1. Ben, keep in mind that cap rates are lower in closed access cities,so you need a few % in cap gains each year just to breakeven compared to a cheap city.

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  11. Ken-

    You are right. Taking into account cap rates, which are 1-2% higher in secondary markets, buying in closed vs. open access cities looks like a wash, with lots of chance variation and luck.

    Well, EMT does have its uses.

    As I said, best make sure you can grease the skids to a zoning variance, and then buy property in a closed access city.

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  12. "The foreigners are taking our homes" argument is really just a NIMBY excuse to not permit anymore development. It's really an ingenious strategy on their end. It allows them to signal to both the anti-capitalist left and the xenophobic right in advancing their zero-growth Malthusian agenda.

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    1. I think you might be giving them too much credit. I think the xenophobia is largely internal and sincere and this particular form fits comfortably within the normal progressive lineup of insiders and outsiders.

      At first I balked at your characterization of the Malthusian outcome as an agenda rather than a side effect. But, I think you are correct. At its base these political obstructions do gain strength from a discomfort with growth itself and an unfortunate association of economic abundance with extraction and unsustainability. In a way a Malthusian context is the agenda, and the stresses and inequities caused by these cities are a clear window into the inevitable disaster that broader anti-growth sentiment leads to.

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    ReplyDelete