(The long view is a new biweekly column that analyzes big-picture real estate issues through a global lens.)
When China’s property market took off in the years following the 2008 global financial crisis, so did Hong Kong’s. The city was an ideal target for the growing class of wealthy Chinese apartment buyers: geographically and culturally close, yet still somewhat safe from the ruling Party’s reach. As Chinese investors flocked in, prices ballooned. In the two years leading up to the first quarter of 2011, the average price for a mid-sized apartment rose by 65 percent, according to Hong Kong government data.
By October 2012, regulators had had enough. The Hong Kong government imposed a 15-percent tax on property purchases by anyone who wasn’t a permanent resident. “This is an extraordinary measure introduced under exceptional circumstances,” Hong Kong’s financial secretary John Tsang told the Wall Street Journal at the time. In the two years since the tax was introduced, the average price of a mid-sized apartment grew by just 5.3 percent.
Since 2012, several cities with a heavy influx of foreign – and especially Chinese – apartment buyers followed Hong Kong’s model. Singapore imposed a 15-percent tax on foreign apartment buyers in 2013. That same year, Switzerland set a 20-percent cap on the number of pieds-à-terre in any community. This April, Britain introduced a “stamp tax” on pieds-à-terre. In June, the Australian states of Queensland and New South Wales (which include Sydney, Brisbane and the Gold Coast) introduced 3- and 4-percent taxes on foreign homebuyers. And in August, Vancouver set a 15-percent tax on foreign property buyers.
One glaring exception to this trend is New York. What’s up with that?
On the surface, New York deals with similar challenges as Hong Kong, Singapore, Zurich, London, Sydney and Vancouver: rising global wealth and low interest rates have led to a spike in foreign property investors, pushing up apartment prices and making neighborhoods less affordable for long-term residents. In other cities, this trend has created political pressure to stem the influx of foreign money. In New York, however, a tax on foreign buyers is yet to pick up serious political momentum, and subtle differences between it and these other cities may help explain why.
One is tax aversion. “In this city, raising taxes is generally abhorrent to elected officials and there are no strong feelings against foreign investment,” said George Arzt, a veteran Democratic political consultant. “In fact, many people feel that raising taxes would wound the golden goose that may be fueling the economy.”
That’s certainly the sentiment among real estate industry professionals.
“I can’t imagine that given how incredibly profitable foreign investment has been in elevating the Manhattan market to a new historical high that this would be regarded as a wise idea,” said John Burger, a top luxury broker at Brown Harris Stevens , said in September 2014 when Democratic State Senator Brad Hoylman proposed a pied-à-terre tax.
In Britain, it was the ruling Conservative party that introduced the stamp tax. In the age of Tea Party and congressional anti-tax pledges, Republicans are unlikely to follow suit. Hoylman’s proposal won support from the City Council, but fizzled because the Republican majority in the State Senate would not go along.
Another explanation may be concern over New York’s image. “New York brands itself as the capital of the world,” said Jonathan Miller, CEO of appraisal firm Miller Samuel. It’s this image as the alpha-alpha city that brings in investment and tourism, making it “pretty hard to single out foreign buyers of real estate and still keep the city’s brand consistent.”
And finally, in a market as large as New York’s, foreign buyers may not move the needle on prices as much as they might in other markets.
“Our foreign investment is fairly well below 15 percent (of apartment sales) as a whole,” said Edward Mermelstein, a real estate attorney who works with overseas real estate investors. “We’re not as affected by foreign investment driving the prices up.”
Anti-discrimination laws prevent brokers and city agencies from collecting data on the share of foreign apartment buyers, meaning no one knows for sure how many there are. But it’s clear prices in New York haven’t risen as dramatically as in some other cities. In Hong Kong, prices rose 65 percent in two years. In Vancouver, prices rose 31 percent in the first eight months of 2016 alone. In Manhattan, meanwhile, the average apartment price rose by a more modest 13 percent over the past year, according to Douglas Elliman, and the market shows signs of slowing down. Slower price growth may mean even less political pressure to curb foreign buyers.
But New York might not lag behind forever. The city always had two major drawbacks compared to other global hubs: geography and visa restrictions. Hong Kong and Vancouver are significantly closer to China, while London is a short flight from Russia and the Middle East. It’s also far trickier for Chinese and Middle Eastern nationals to get visas for the U.S. than these countries. But taxes on foreign buyers in those cities could tilt the balance in favor of New York in the medium run, Mermelstein argued. “Any time you’re putting up barriers you’re driving investment to other locations,” he said. “We’re just starting to get many more checkmarks in our column.”
As other cities impose taxes on foreign buyers, more of them may choose New York, putting upward pressure on prices. That could in turn increase political pressure to limit the influx of overseas money. In October 2014, the New York Times cited census data showing that more than 50 percent of apartments in a three-block stretch of Midtown East were vacant the majority of the year.
State Senator Liz Krueger told the Times about a developer who was talking about how his buyers would never be around, so they wouldn’t take up resources.
“He said it like this was a positive thing,” Krueger said. “You can’t make this stuff up.”
For now, the city is resisting the global trend of taxes on foreign property buyers. But it may become harder and harder to do so.
(Read more of The Long View here.)