Housing shortageIncome Property

Do Foreign Investors Cause Rising Prices?

Imagine finding the perfect home for you and providing an offer above asking price. You’re going to feel good about your chances. But there’s a problem. Many sellers are more likely to take an all-cash offer over an offer including a down payment and a loan. You’d need to really wow the seller with a much higher price to compete with an all-cash offer, driving sale prices above already high asking prices. Chances are it’s a foreign investor that doesn’t even plan to live there, which can be even more frustrating when you don’t get the deal.

It’s very difficult to know whether a buyer is a foreign investor, though, since California does not require buyers to disclose citizenship or residency. There are a few signs. One of the biggest indicators is an all-cash offer. Foreign buyers are roughly twice as likely to pay all cash as domestic buyers. If the tax address is out of state, you know that the buyer probably doesn’t live here, though you don’t necessarily know where they live. You can try to look at the surname, but that isn’t a great indicator given the ethnic diversity of California as a state. What if all three look like a foreign investor? Is that a good indicator? Probably, but even that isn’t guaranteed.

What we do know is where foreign investors are coming from. In California, it’s predominantly East Asia. China in particular has historically dominated California’s foreign investment scene. Even as that number is dropping due to legislation in China making it more difficult to take money out of the country, investors from other countries in East Asia are picking up what Chinese investors are leaving behind. And the numbers are still rising overall.

Does foreign investment actually affect prices, though? Maybe. In Vancouver, Canada, instituting a tax on foreign investment drove prices down initially, then they rebounded back to where they were before despite the number of foreign investors dropping. Prices had been rising quickly, so perhaps it gave a short reprieve without much long-term effect. In California, it’s clear that there is some effect. How large of an effect is up for debate, and foreign buyers probably don’t affect the market as much as lack of construction and outdated zoning laws.

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