My understanding is that a decent chunk of why real estate prices in certain cities have skyrocketed is because foreign investors want a place where they can park their money outside of their home country, and know that the money can’t be stolen from them.
As a result wealthy investors from China and Russia have been buying up property in London, NYC, SF, Vancouver, Sydney, etc.
But are there reasons they are picking these cities? Why not Dallas Tx? Or Montreal Canada? Machester UK?
Why are international investors driving up home prices into the 7 figures in a handful of select cities, but choosing not to invest in other cities? Is there any logic or reason to it? In theory, shouldn’t economics mean that as home prices skyrocket in a handful of cities that international investors will want to start investing in lower cost cities instead?
On one hand I guess I could understand Chinese investors picking SF or Vancouver since those cities border the pacific ocean. But still, is there rhyme or reason as to why foreign investors pick the cities they pick?
Because while prices are indeed sky high in those cities, it also indicates prices are unlikely to drop substantially. Even in places where governments have implemented policies to offset the effect on house prices, all they’ve managed is to slow sales, not actually drop prices.
In those cities house prices don’t often EVER drop. I think that’s the key.
Another reason is that some countries provide residence permits and/or a quicker path for citizenship if one invests a certain amount. Buying real estate is a relatively-easy way to do so: choose a location that’s always in high demand and you’re also reasonably sure to be able to get your money back. And those are the same locations which are likely to already have agents specializing in expats, foreign investors, etc. Another factor: which cities are known to foreigners.
Think of Spanish cities you know. Most likely the two names that came to mind are Barcelona and Madrid. Those are also the two cities with the greater amount of foreign-owned empty flats. Along with Mallorca and Ibiza, they are the locations with the greater amount of foreign investment in tourist flats.
The most expensive city in Spain in terms of real estate is actually San Sebastián. But foreigners don’t think “I’ll look up prices by square meter”; they either pick a city they’ve heard of or a beach location… again, that they’ve heard of. You don’t get a lot of Chinese investors in Denia but you get a lot of Brits, because the Brits have heard of Denia and the Chinese haven’t.
There also may be a density effect. What’s easier to manage, 10 McMansions in Iowa or one apartment in Manhattan? Similar amounts of money can be stashed in either. Also, these investors don’t have time or ability to manage the property themselves, and presumably there are fixed costs charged by property management companies.
Another factor is that that apartment in Manhattan, most of the value is in the land it occupies. Not the unit itself. While a McMansion in the middle of nowhere, most of the value may be in the actual structure and not the land it sits on.
In addition to the practical and financial issues, the cities where foreign investors choose to buy apartments are also cities that are desirable to visit.
While many of these apartments lie empty most of the time, their owners often do stay in them for a few weeks a year, and allow family members and friends to use them as holiday pads, so they want their real estate investments to be in cities that they are interested in visiting.
A Saudi prince or a Chinese business owner doesn’t want to travel overseas and spend two weeks in Des Moines or Calgary or Huddersfield.
Here is an excellent article on some of the sources of this wealth, and why they are parking it in US real estate. In short, ownership in real estate is a way to circumvent some of the newly created anti-money laundering rules.
There’s the strange case of multi-billionaire Japan National Genshiro Kawamoto whose endgame no one has been able to fully figure out.
In the 80’s he bought over 170 properties including dozens in the most expensive/elite part (Kahala) of Oahu, Hawaii.
He claimed that these were all his personal homes (more about his below) and were not for investment purposes. He initially lived in a few in the beginning, adding numerous sculptures to the landscape, but never returned again. He then rented some out to Native Hawaiians for $150-200 a month and let those properties deteriorate. The ones he didn’t rent out, he just let them fall into disrepair, leading to complaints from the neighbors. In 2013, he sold the majority of his properties in Kahala for $128 million (estimated value was $200 million).
Speculation is that he was trying to drive down home prices in Kahala (which are outrageously priced) to buy more properties in the area, but he never did buy any more.
In 2018, he was sentenced to 5 years in jail for corporate tax evasion in Japan (~9 mil U.S.) between 2009-2011. His lawyer claimed that the income from his properties was personal, not corporate. Recalling Genshiro’s claim that the properties he bought in Kahala were his personal homes.
You know how people horde cars and shoes and dresses and everything else nice? This sounds like the same mental glitch, just from an individual with orders of magnitude more financial resources. To be honest, he probably did view these as “his homes” and his renters were just helping him out with the upkeep on homes he wasn’t presently using.
One of the reasons foreigners invest in real estate in other countries is financial security, in case things go pear-shaped in their own country.
If that’s your goal, why would you invest in Montreal, in a province that has twice held referenda to separate from Canada, and was governed by a separatist government on and off since 1976, as recently as 2014? that’s exactly the kind of potential political instability that the foreign investors are trying to avoid.
Vancouver is different, since it is part of the Pacific community, with strong trade ties across the Pacific, and no separatist movement.
Piffle. Prices in the Bay Area dropped plenty in 2008. I suspect that there are others like them in those markets. Where I live you can do pretty much anything you want and never not speak Chinese. So, perfect for Chinese investors.
Montreal was just a city I picked, I looked at median home prices in large canadian cities and saw Montreal wasn’t too high. Ottawa is about the same price.
Montreal is a special case, though, for the reasons Northern Piper noted. But Vancouver is not unique among Canadian cities. Toronto is another example of a huge influx of foreign buyers, and has been for quite some time – so much so that the Government of Ontario recently enacted tax surcharges on foreign buyers similar to those in BC. And the reasons are not hard to fathom. The way house prices have been rising in some areas, some savvy investors who bought in at just the right time managed to more than double the value of their investments in as little as five years, completely aside from the rental income they were getting. The problem is that these investors aren’t just riding a tide of rising house prices, in many cases they are significant contributors to it. Which in fact is why governments felt compelled to act.
I wonder what happens when an entire city becomes so expensive due to rich people both domestically and internationally buying houses there that the homes can no longer be afforded by regular people.
I know this has happened for quite a while in places like SF. My impression is people end up commuting 2-4 hours a day to get to work from further away suburbs.
But what happens when the appeal of the large city isn’t there, or other large cities with similar jobs and wages offer more realistic housing prices? It seems people would just leave in droves. However because all teh houses are bought and there is still demand from investors, housing prices wouldn’t decline.
Do we eventually get ghost towns like they have in China
Yeah I think this is definitely part of it - since investors might already have a property there that they either live in part-time or perhaps have relatives or friends living in, it would make them more likely to buy other properties in that city since they’d already be in the area. I’m thinking that these are cities that the rich buyers also already likely have some connections in, whether they be business or social connections, which would have drawn them to the city in the first place.
There may also be a bit of “luxury good” bandwagon effect - ie. perhaps investors continue to invest in these cities because their prices have continued to go up so rapidly, so there is the perception that it is a better investment than places with lower valuations.
Can we get a cite that this claim is true? I am skeptical. I bet foreign investors invest in lots of places not in those cities.
We see news stories about foreign-investor-driven sky-high prices in those cities because lots of people read stories about how you have to have a household income of $300k to afford the median home in San Francisco and want to explain why, and no one cares that the cost of homes in Dallas has done sort of normal Dallas-y things.
In the case of Sydney specifically, your data is not actually true - foreign investors certainly do like Australia, but they show no particular preference for Sydney over other state capitals (in those graphs you can pretty much take ‘NSW’ as a proxy for ‘Sydney’, ‘Victoria’ for ‘Melbourne’ and so on and so forth - not least because a clear majority of Australians live in a state capital, and that’s where all the expensive houses are)
One of the things that drives this is wealthy overseas investors buying a place for their kids to live while studying at an Australian uni. Foreign students are very very big business for unis these days - about three percent of the population of the country is overseas students. Though not all of them get a flat bought for them, obviously. But you can be pretty confident property prices won’t ever fall too far - too many MPs own a lot of investment property.
Foreign investors are a piece of it, but a bigger part is that the number of jobs here (and good jobs) is growing faster than the available housing. By a lot.
The state is trying to do something about it. Cities must give permits for housing within half a mile from a transit hub. That eliminates the NIMBY factor. And the housing can be one story taller than the maximum allowed for that area.
But towns close to Silicon Valley are built out pretty much, so a lot of building and lower cost housing is happening further away, East and South.
Others have already said it: investors pick locations where the demand for land is high. In a few of the cities you mentioned, like SF for instance, the demand for land is high because it’s a place that attracts highly-educated working professionals, which actually may even include the families of those investors. Let’s say you have a Stanford engineering student who comes from a wealthy Chinese family that can afford maybe not the most expensive condo in the city, but a condo that is average or slightly above average in value and is in a location that will hold its value over time. The Stanford guy lives in part of that condo and maybe another part is rented out to someone else. The family also has a place to crash when they visit. Then said Stanford grad gets a job in the area as a data analyst, gets a six figure job, and stays in the area. They keep the property in the family. Maybe Stanford guy moves in. Maybe they rent it out. Maybe something else. It’s easier to facilitate in densely populated, geographically condensed areas than it is in larger spacious areas like DFW, but I’d say the same thing happens in certain parts of the Metroplex, too.
Beyond that, real estate is just a hedge investment in case their other paper investments decline in value. Our laws are very friendly to real estate investment, thanks to a very powerful lobby (and other lobbying groups that support them, like the contractors and builders and all their subcontracting associations). Real estate is a cornerstone of the American economy.
I don’t think it is true of London/Manchester. There are currently numerous high-rise apartment building projects on the go here much of which is, apparently, funded from overseas:
However as London is what, 10 times(?), bigger than Manchester there will always be more in London.
So, the answer to the OP is “they’re not”. Foreign investors are buying property all over the place, because people with money seek good investments all over.
The impression that it’s limited to certain places is driven by news coverage that’s focused on sensationalism over edification.