The financial deadlock that characterizes the U.S housing market is of great concern to everyone, from homebuyers, to lenders, to governments. And rightly so. For, as it is becoming increasingly more apparent, the housing industry is a key economic fulcrum to the recovery of the economy in general. A strong housing market is vital to economic recovery. But, there are forces at work that affect how Real Estate is bought and sold, regardless of where we happen to be on the economic growth cycle.
The state of property values and real estate markets depends on a delicate economic balance. On one side, a robust industry as it relates to an equally robust economy overall is dependent on a widening tax base that looks to other markets to support continued growth. On the other side, of course, is the danger that domestic pricing on properties will become so inflated as a result of that influx as to lock out the average buyer from investing in a home in the city in which they seek to live.
Let’s take a look at the tax base question first.
Foreign investment can revitalize domestic Real Estate markets
Here in Vancouver British Columbia, where I’m writing this post, I believe we’re experiencing a significant Real Estate bubble. This can be explained largely by offshore investments, mostly from Hong Kong and Mainland China, who seek to invest here due to the city’s reputation as being one of the most livable cities in the world. This reputation speaks well for the long-term value of property here.
Another aspect of this, of course, is that Vancouver is a part of a country, Canada, that encourages immigration and multiculturalism. There is, in many respects, a built in welcome to people seeking to move here, which helps to support a standard of living that may arguably otherwise be out of reach were we to take a protectionist stand when it come to both immigration, and offshore property investment. And with that welcome, Vancouver enjoys an influx of tax revenue from a fresh market that happens to be one of the biggest in the world.
What does this have to do with the U.S market?
Revitalizing U.S housing markets
The implications here have to do with the traditionally protectionist stance of U.S investment laws . With an increasingly older population, and with birth rates beginning to wane domestically, an injection of new life may be found in these same markets. Foreign buyers are eager to immigrate, importing their tax dollars along with them. If those buyers were to shift away from one market, Vancouver for instance, to another market due to one that is more favorable, then they will – if they are empowered to do so. Where one market collapses, another one is fostered elsewhere. And parallel markets, like Brazilian condo buyers in Miami for instance, can illustrate the point of how foreign investment is a strategy to reduce surplus.
More buyers from outside markets potentially shorten the inventory age of properties, stabilize listing prices against selling prices, all the while creating and maintaining more demand as populations shift.
But, as I mentioned – there’s a balance to be struck.
Real Estate market growth and the average buyer
As to the domestic Real Estate market here in Vancouver, the ballooning housing prices that are the result of foreign investment here represent the other extreme upon which a balance when it comes to a supportable market is concerned. With a huge influx of foreign investment, the over-inflation of market value, and the creation of scarcity, this often has the impact of creating property values that expand beyond the financial reach of the average buyer.
Also, often foreign investors are not necessarily residents. Some wealthier buyers invest in foreign property purely as an investment to build on personal wealth, not as a means to contribute to a neighborhood as a community member and citizen. As a result, many communities characterized by empty, character-less homes instead of vibrant neighborhoods. This dynamic can leave the domestic buyer behind, losing cohesion in communities even when they can afford to buy into them.
Perhaps it’s this fear which makes many regions in the United States wary of opening up immigration laws and foreign Real Estate investment regulations. Yet to restore balance, new blood is needed to infuse a once-vital housing industry. A revitalized housing industry in turn can infuse the whole domestic economy at times like these, when surplus must either be waited out as it is consumed by a dwindling domestic buyer base over a longer period of time, or made available to a broader base and consumed over a shorter period.
How to find balance in revitalizing Real Estate markets
The ideal scenario is simple enough wherever we happen to live, it seems to me. We need to welcome in foreign investment and the wider tax base it represents, while also making sure that existing citizenry who seek to invest in property are not shut out of the evolving market.
What isn’t simple is how.
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