Offshore Investors are the solution to the housing crisis not the cause.
We are going into a predictable real estate market cycle in the new-build housing market. The sequence of events will be as follows:
- 2023 House Prices will Drop – no one knows by how much, but they will drop.
- Transaction volumes will decrease – only developers and those forced to sell will sell. There will be far fewer transactions.
- Developers will reduce production – developers are companies. They need to make a profit. Developers do not build property, so they have “stock” ready on demand for buyers. They make their profit when sales complete. They build to demand – less demand, less property is built.
- Supply Crunch – developers will slow production. Those not forced to sell will retreat from the market to wait for better times ahead. This will create a supply crunch.
- Rents will Increase – there is no shortage of renters. The shortage of supply will further increase rents.
- Offshore Investors will return – fear of inflation will drive investors back to the market. They will search for yield rather than growth. Foreign investors will be the first to return to the market. They have a currency advantage. The cost of living crisis will not impact them as much and wages have grown in Asia and Middle East.
People will blame foreign investors
As the housing supply crisis gets worse and rents go through the roof. Housing supply will decrease. Most new property will be sold to offshore investors.
People will point to developers promoting their projects offshore. They will say how greedy developers are and that all they care about are profits. The housing crisis will dominate the media. A narrative will appear about how bad foreign investors are. The media will say they lock young people out of the housing market.
Supply crunch will be worse this time
The supply crunch will be worse this time than post the Global Financial Crisis (GFC). Developers have found it more difficult to fund and build in larger cities because of Covid. Smaller developers collapsed as a result of the GFC. The same will happen again in 2023. There will be a smaller number of developers building less houses.
Working from home will decrease, and the economic lockdowns will feel like a thing of the past. Young people will return to larger cities. Higher transport and energy costs will mean people will look for smaller housing. Which is more affordable and efficient housing. It won’t be there. Developer supply will have stopped and smaller landlords have gone.
Governments don’t have any more money
The magic money tree is now broken. The cost of funding furlough, energy bills and wage increases has racked up a massive bill. High inflation means whatever money is available will buy less. Liz Truss demonstrated markets will not respond well to printing more money.
Governments will be stuck between a rock and a hard place. They won’t have any money to build social housing. And they don’t have the ability to fix problems within their grasp like the planning system. Check mate.
People aren’t asking the right questions
People blame foreign capital for buying all the houses. Instead, people need to ask themselves how can we better harness all this money that wants to invest in our country? It wants to buy real estate. What can we do to get it to buy the real estate we want it to buy?
The Industry is to blame too
The fact is the real estate industry is to blame too. Everyweek in cities from Singapore to Shanghai there are property exhibitions. In Hong Kong there are about 1,000 “property exhibitions” each year for foreign properties. The properties are from Auckland to London.
The reason for this is simple. Foreign investors buy when others don’t. Developers must pre-sell 30 to 50% of a development at the early stages of construction. Domestic markets are not deep enough to absorb this supply at that point.
Instead of educating people about the market and the valuable role that international investors play, property agents and developers don’t acknowledge this market exists.
Better rules will create better outcomes
You cannot tax investors and developers into creating more housing supply. It is easier to create better rules which funnel capital into the property you want created. If the government focuses foreign capital on creating the outcomes it wants, it will respond.
The aim should be to build more housing and moderating house price growth. This will stimulate the economy through construction. This could be achieved with the following:
Prevent foreigners from buying secondhand property
If you want investors to add to new housing stock. Prevent them from buying secondhand property. Many countries like New Zealand and Australia already have these rules. This has two advantages:
- Creates new housing – investors will buy new-build housing market adding new housing to the countries pool of rental stock
- Takes heat out of secondary market – it takes the heat out of the secondary market, if investors can’t create housing inflation and cash out, they will buy for yield. Rather than just to speculate and trade.
Limit number of properties which can be sold offshore
Limit the proportion of a development which can be sold offshore. Australia and New Zealand both limit the proportion of a development which can be sold offshore. This has two specific advantages:
1. It leaves a proportion of the development for local consumption
2. It moderates pricing because developers cannot escalate pricing because they will need to sell the remainder of the scheme domestically
(You can find our guides to investing in Australia and New Zealand here.)
Different rules for different developers
If you want more small and medium sized developers, give them a strategic advantage. Set different international sales rules for different developers based on the volume of stock they build in a given year. If smaller developers are able to sell a greater proportion of a scheme offshore, they will be more competitive in buying land.
International investors have many other benefits
Offshore investors have other benefits which are completely overlooked.
Always appoint property managers
Offshore investors always appoint a property manager because they are so far away. It means tenants generally have a better more professional rental experience.
New-build creates more modern rental stock
Offshore investors generally buy new-build. They add better quality, newer property to the housing market.