With housing costs quickly increasing in several of the country’s most dynamic housing markets – rising faster than incomes, in many – anxiety over deteriorating housing affordability is leading policymakers to seek solutions. And this issue is not unique to the United States; cities around the world are struggling with similar issues and looking for workable solutions.
But identifying solutions begins with identifying causes, and one proposed explanation for rapid housing cost growth in many of these cities is the notion that foreign home buyers are to blame. In response to this theory, a handful of global cities have enacted new taxes on foreign home buyers – notably Vancouver, Toronto, Singapore and Sydney. A number of U.S. communities are weighing similar proposals.
These kinds of taxes are largely intended to discourage foreign home buyers, with the aim of easing the competition local buyers face in their own housing markets – competition that, especially when paired with limited inventory, has the effect of pushing up prices and contributing to affordability woes. A secondary objective to these taxes is also often to raise revenue to fund local affordable housing initiatives.
Experiments with these types of policy solutions are still young, and their ultimate efficacy remains unknown. Still, there are important early lessons to be learned from those cities that have tried them.
In the summer of 2016, Vancouver enacted a 15 percent tax on purchases made by foreign nationals. Home prices did drop in the immediate wake of its enactment, but they have since begun to climb again, matching their pre-tax growth pace. Thus far, any reprieve to local buyers has been modest, short-lived and concentrated in the market for higher-end homes. Toronto enacted a similar 15 percent tax in April 2017 – and after a brief dip, home prices increased in September for the first time since the taxes went into effect. In Sydney, a relatively small 4 percent tax enacted in early 2016 had no discernible effect, and was recently doubled.
In Vancouver and Toronto, the taxes were not enacted in isolation but were part of broader set of policies – which included tightening mortgage lending standards — all aimed at cooling local housing markets. They also happened at a time when Canada’s central bank raised interest rates as it became increasingly vocal about its concerns around high valuations in the Canadian housing market. It is possible that some of the decline in prices observed in these two cities in the months immediately after the taxes were enacted was driven less by a downward shift in international demand, and more by local buyers and investors shifting their expectations downward.
In Vancouver, the tax has raised a nontrivial amount of revenue for affordable housing development – about $102 million during the first nine months of the tax and a testament to the persistence of many foreign buyers despite the tax. To put this in context, British Columbia’s 2016 budget estimated the province could fund 2,900 affordable rental units with $500 million in revenue. Annualizing the foreign buyer tax revenue collected thus far, that means the tax could fund around 790 affordable rental units – a welcome increase in supply that certainly wouldn’t hurt British Columbia’s housing market, but one that’s not exactly transformative either.[1]
To the extent that evidence exists on the impacts and effectiveness of these laws, the data are, at best, mixed (and still very much evolving). These taxes have not yet succeeded in fundamentally shifting local market dynamics, but have been more successful at raising revenue for affordable housing development (though the proceeds are small relative to needs).
But there is also evidence of many unintended consequences.
When too broadly written, these laws can inadvertently ensnare some legal immigrants. Where the laws are carefully framed, non-resident foreigners – unlike foreigners moving to a community on a permanent or temporary basis – are typically not the primary target of these taxes. Six months after Vancouver’s foreign buyer tax was initially enacted, local lawmakers created a loophole exempting foreigners holding Canadian work permits. But even these exemptions may exclude some (admittedly less common) edge cases of foreign buyers with legitimate local interests, including non-resident parents of foreign students wishing to buy a residence for a child studying in the host country.
It is also possible that taxing foreign home buyers may not entirely deter them from the market, but instead might push them to consider less-expensive homes as they incorporate the tax into their budget. The typical international home shopper searching for homes in the United States in Q3 2017 was targeting a price point of $399,000, according to Zillow’s research. The typical domestic home shopper targeted a price of $260,000. If foreign buyers were to incorporate a 15 percent tax into their budget, they would be in somewhat more direct competition with a bigger pool of local buyers.
Finally, there are compelling, non-economic unintended consequences of these tax proposals. In many of the cities where foreign buyer taxes have gained the most traction, Chinese home buyers are the most active international buyer group. And intended or not, the booming – if sometimes shaky – Chinese economy looms in the background of many of these debates, and the tax proposals resonate with locals anxious about Chinese immigrants and Chinese money.
China’s decades-long boom has created a burgeoning middle and upper-middle class eager to ensure the longevity of their newfound wealth, particularly when there are cyclical fears about the underlying health of China’s domestic housing market and the financial system that underpins it. Though there are workarounds, Chinese government policies enacted in late 2016 to limit the amount of foreign currency Chinese nationals can export poses a more meaningful headwind to Chinese demand for homes abroad.
Against this backdrop, Asian community groups in the Vancouver area reported an increase in racist and xenophobic sentiment in the months after British Columbia’s foreign buyer tax was enacted. Public officials in British Columbia were quick to disavow this sentiment, but the experience suggests that civic leaders should at the very least be very cautious in their language and clear in relaying the expectations and intent of the policies when discussing them.
These cautions are not intended to minimize a handful of legitimate concerns about some foreign home buyers. Policymakers – at the federal and local levels – could do more to ensure that Americans and foreign home buyers compete on a level playing field.
But at the end of the day, the fundamental drivers of foreign home buying are not going to disappear. The global financial environment makes American real estate a particularly attractive investment. Emerging economies are growing increasingly affluent, and new members of the global middle class are looking for safe investments. And some cities, both in the U.S. and abroad, are and always have been particularly attractive places to live, whether because of their environment, culture, opportunities or all of the above and more. As such, localized housing affordability challenges are not new and are not going away, particularly in the world’s leading cities.
The emerging body of evidence suggests that taxing foreign home buyers isn’t a cure-all for much deeper economic and urban planning challenges, and more often than not it distracts from these problems. More worrisome, these policies can lead to unintended consequences. The policy experiment is still young and our understanding of it will continue to evolve as more data become available. In the interim, we should not allow this conversation to distract from the more complex – but likely far more fruitful – challenges of maintaining a hard-earned quality of life all while building more affordable housing, investing in public transit and infrastructure and accommodating economic growth.
[1] This does not account for costs associated with administering the tax.