This week I had a good chat with a London cabbie who besides bemoaning England’s cricket team, said that one of the results of the property boom in London is that he rarely gets fares to Chelsea, which has emptied out as properties are bought by foreigners who do not reside in them. The story of foreign investors driving up property prices is the same in other global cities including New York, Toronto and Paris.
Returning to Australia, the subject of rising house prices is reaching fever pitch. With the real economy declining as a result of the fading of the resources boom, and with banks curtailing their investment lending, the finger is being squarely pointed at foreign investors.
The demand by foreign investors for property is a global phenomenon. And much of the investment is from emerging markets where individuals are seeking to transfer wealth to countries where the rule of law means provides long term security.
The desire to transfer assets from the developing world to the developed world is likely to be a permanent feature of the new global economy. But what are the implications?
In the short term governments may be happy to see housing markets buoyant and local construction stimulated, but in the long term are we creating economic imbalances?
The danger is that rising property prices in global cities will ultimately make these cities uncompetitive as higher wages and higher rents makes the cost of running a business unaffordable. The increasing cost of operating in the world’s global cities, may in turn cement the divide between the developing and developed world where business costs will be lower. The cycle of property investing is therefore likely to continue as wealth will continue to be built in developing countries and transferred to property investments in global cities.
What should governments and investors do?
The first thing is that there is a need to establish sensible constraints on the flow of capital.
Singapore took an early lead in this direction in 2011, introducing a foreign buyers’ sales tax, which is now 18%, after property prices boomed by 20-30% in 2008-09. Singapore provides exemptions from the sales tax for certain countries, the result of which has been to stabilise property prices.
We may also need legislation to prevent hoarding of housing. Requiring investors who do not rent out a property to pay a special levy may be one option that could ensure that increased housing supply actually results in an increase in availability of rental properties.
By structuring foreign sales taxes at a rate that allows for sensible investment there is the potential to raise revenue that could be used in ways that are in the long term interest of cities. Taxes on empty households and foreign buyer sales taxes are a good way of financing infrastructure, urban development and affordable housing.
The final area of focus needs to be on governance of emerging markets. We need to create a global environment where private wealth feels secure investing for long term in the economies where they create wealth. With growth in emerging markets likely to be higher than growth in developed countries it is also in the interest of institutional investors to focus on improving governance, which would allow greater flows of pension capital to be allocated to growth regions. This means that institutional investors should actively support measures to crack down on corruption wherever it may occur.
Foreign capital has the potential to be a source of development that can stimulate local economies, but like fire it is a good friend, but bad master, and must be managed.