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The Journal of Real Estate Finance and Economics

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19.10.2020

Does Restricting Outsiders Always Lower Price and Benefit Insiders?

verfasst von: Tat-kei Lai, Travis Ng

Erschienen in: The Journal of Real Estate Finance and Economics | Ausgabe 1/2022

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Abstract

Policies that restrict outsiders are common. Some justifications include protecting insiders from high price and leaving more of the concerned products to insiders. Sometimes these policies fail to work because outsiders can get around the restrictions. In a model in which a policy of restricting outsiders is anticipated, we find that if the policy works, it only sometimes lowers the price. When the price does decrease, the product quality decreases too. Not every insider would benefit equally; those insiders who likely suffer are identified. While restricting outsiders may or may not reduce insiders’ consumer surplus, outsiders and the producer are always worse off. They therefore would find ways to get around the restrictions. Evaluating these policies must (a) take into account the possibility that they might not work at all, (b) check their effects beyond just price if they do work.

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For instance, the Thailand Condominium Act of 1979 restricts foreigners from owning more than 49% of the floor space of a condo. Someone who is not a Swiss buying a property in Switzerland must have the right permit and license. Canada, Australia, and New Zealand all have certain restrictions for foreigners in buying properties. Different forms of such restrictions exist, including a) Ex ante measures: outright exclusion, extra tax, extra reporting/disclosure obligations, mortgage restrictions, etc.; b) Ex post measures: extra reporting/disclosure requirements, extra restrictions of the property rights, etc.

For example, those cafeterias that are located inside Hong Kong industrial buildings are licensed differently from regular restaurants and are required by law to only serve workers of these industrial buildings.

Former Australian Prime Minister Kevin Rudd made a similar remark on August 21, 2013 during a discussion on the foreign ownership restriction of the agricultural land of Australia: “We often get criticized for trying to be protective. I actually look around the world and I see many, many countries being equally protective of their own core assets.” Source: “FactCheck: do many other countries restrict foreign investment in agricultural land?” by Margaret McKenzie, The Conversation, September 6, 2013, https://theconversation.com/factcheck-do-many-other-countries-restrict-foreign-investment-in-agricultural-land-17691.

One study is Herguera et al. (2000). Their question is put in a slightly different context. Rather than focusing on outsider-buyers, the outsider is a foreign seller who competes with an insider: the domestic seller. Without restriction, they both sell a vertically-differentiated good to domestic buyers. They compete by simultaneously setting quality in the first stage, then they simultaneously choose prices in the second stage. Herguera et al. (2000) find that restricting outsiders (i.e., disallowing the foreign seller to sell to domestic buyers) affects the equilibrium quality and price chosen by firms. The combinations of price and quality available to domestic buyers are thus affected accordingly.

For example, New Zealand’s Overseas Investment Amendment Act 2018 bans some non-resident foreigners from buying existing houses. However, one may still argue that even existing houses involve “production” after they are built because owners continuously decide how much to invest in maintaining their houses. Therefore, applying our sequence in policies such as Overseas Investment Amendment Act 2018 on existing houses is not entirely inappropriate.

Similarly, Section “Real Estate” describes another Singaporean policy in which the government introduces executive condominiums (EC) and restricts initial sales to Singaporeans, and then restricts resales to foreigners until after the owners have lived there for 10 years. EC developers know they are building them. Therefore, the restrictions are anticipated.

The then Hong Kong Secretary for Development, Mr. Paul Chan, reminded that “The measure is only applicable to flats constructed on residential sites subject to the HKPHKP pilot scheme but does not apply to existing housing stocks in the market or new housing supplies not subject to the pilot scheme.” Source from https://www.info.gov.hk/gia/general/201406/11/P201406110675.htm

Low bidding prices were expected, but the then Hong Kong Secretary for Development, Mr. Paul Chan, refused to make such a prediction. Instead, he stated that it “aims at giving priority to Hong Kong Permanent Residents to make use of our scarce residential land resources when a tight demand–supply situation occurs in the property market.” Source from https://www.info.gov.hk/gia/general/201406/11/P201406110675.htm.

The tax comes from Bill 28, Miscellaneous Statues (Housing Priority Initiatives) Amendment Act, 2016, 27 that was introduced in the B. C. Legislature on July 25, 2016. The rate increased from 15% to 20% on February 20, 2018. A Notice of Civil Claim filed to the Supreme Court of British Columbia dated September 18, 2017 shows the plaintiff, a non-Canadian, evaded the tax with the help of a defendant, a Canadian who assisted the plaintiff to buy a Vancouver property by agreeing to put his name on the title. Retrieved from https://assets.documentcloud.org/documents/4058607/Wu-v-Chu.pdf. The Globe and Mail reported that brokers and agents have advertised to prospective foreign buyers of ways to evade the tax, including setting up partnerships and buying through complicated contracting between Canadians and non-Canadians through an exclusive rent-to-own program. Source: “Skirting around B.C.’s tax on foreign buyers,” by Xiao Xu, The Globe and Mail, URL: https://www.theglobeandmail.com/real-estate/bcs-foreign-buyertax-has-some-buyers-looking-for-aloophole/article36520663/.

The Hong Kong law Cap. 132X Food Business Regulation restricts factory canteens from serving customers other than factory employees working in the same building. In May 2017, the Ombudsman issued an investigation report showing evidence that factory canteens usually served outsiders. The report states “the personal experiences of the investigation officers of the Office of The Ombudsman (the Office) reveal that factory canteens are patronized by people many times without having been asked whether they are factory employees.” The report can be retrieved from https://ofomb.ombudsman.hk/abc/files/DI405_ES_E-11_5_2017.pdf. A similar investigation was performed in the U.S. to check whether cafeterias located inside Federal government buildings served outsiders, too. Section “Cafeteria in Various Establishments” offers further details.

In the housing context, residents prefer less crowded places to live. In the cafeteria context, insiders may prefer less crowded cafeterias to enjoy food and short queues.

The term “crowding out” has a specific meaning in macroeconomics. Throughout this paper, we use “crowding out effect” to refer to the situation that customers do not like the presence of other customers (such as customers do not like crowded places to live or crowded cafeterias).

Take real estate restrictions as an example. The kinds of real estate foreigners desire may differ from those of their domestic counterparts. One reason is that the kinds of renters they can find may differ from those of the locals. In Li v. British Columbia, 2019 BCSC 1819, mathematician Dr. Jens von Bergmann testified that foreign buyers are mainly concentrated on the high-end of the Vancouver real estate market. In contrast to the notion that foreigners are likely speculators, Dr. Von Bergmann testified that locals are more frequently involved in “flipping” houses than foreigners.

We will derive marginal customers in “Optimal Choice of the Customers” with and without outsider restrictions. They are indifferent between buying and not buying and are characterized by theta that must fall between 0 and 1. Suppose under the assumption of uniform distribution of taste, the marginal customers with and without outsider restrictions are between \(\underline {\theta }\) and \(\tilde {\theta }\), where \(0<\underline {\theta }<\tilde {\theta }<1\). Suppose some probability density from a range of 𝜃 below \(\underline {\theta }\) is reshuffled to another range of 𝜃 below \(\underline {\theta }\), such a reshuffling upsets the uniform distribution assumption but would not alter the determination of the marginal customers. Our results remain robust to similar kinds of such reshuffling. It suggests that uniform distribution is not necessary for our results to hold. More general distributions, however, may not guarantee analytical solutions and may require numerical solutions instead.

In another context, the kinds of restaurateurs who bid for college cafeterias restricted from serving customers other than students and teachers likely differ from the kinds of restaurateurs who run regular restaurants facing no customer restrictions.

These can be seen in Eqs. 5 and 6 when t = 0.

The model of Eid et al. (2013) has also obtained this result in which horse-buyers who value quality more buys high-quality horses, whereas those who value quality less buys low-quality horses.

We do not know how the rent varies without specifying the objective function of the owner of scarce inputs. For instance, the government who owns a land may not have a profit-maximizing objective when conceiving whether or not to allow foreigners to buy the apartments built on it. Some cafeterias in U.S. government buildings are contracted out by General Services Administration; its objectives are beyond profit-maximizing (United States General Accounting Office 1978).

Note that if domestic legal entities are unrestricted from buying real estates, then developers may have an incentive to help their foreign clients (likely through a law firm) set up domestic legal entities to get around any restrictions on foreigners or foreign entities. Other legitimate reasons exist for foreigners to hold overseas real estate using legal entities, such as limiting their personal liabilities and protecting their overseas assets from their own personal creditors. These other legitimate reasons make it difficult for policy enforcers to explain why certain people help their clients acquire real estate using legal entities.

Note that since \(c^{\prime }(s)>0\) by assumption, we have \(c^{\prime }(s^{*}_{\alpha })<c^{\prime }(s^{*}_{1})\) so that in equilibrium, \(\bar {\theta }_{\alpha }<\bar {\theta }_{1}\).

In both cases, insiders with \(\theta _{i}\in [0,\bar {\theta }_{\alpha })\) are unaffected because they never consume.

Singaporeans buying ECs must be screened by the Singaporean government. Source: Singapore Housing and Development Board: https://www.hdb.gov.sg/cs/infoweb/residential/buying-a-flat/new/eligibility/executive-condominiums Statutory declaration is required together with a lawyer’s certificate for a Hong Kong permanent resident to buy an apartment on the land covered by HKPHKP. Source: Hong Kong Lands Department: https://www.landsd.gov.hk/en/hkpp/hkpp.htm

Source: Singapore Housing and Development Board: https://www.hdb.gov.sg/cs/infoweb/residential/buying-a-flat/new/eligibility/executive-condominiums

In finance language, consumption and investment decisions can be separated for PC buyers, but they must be bundled together for EC buyers.

They find that the sub-sample of old ECs have a larger permanent discount of 6% instead of 3% after any transfer restrictions expire.

Following Lee and Ooi (2018), after removing the effects of such characteristics as Development size, Distance to the nearest subway station, Distance to central business district, presence of different amenities (Swimming pool, Barbecue pit, Gym, Mini-mart, Pavillion, Playground, Sauna, Clubhouse, Exercise area, Basketball court, Tennis court, Library, Lounge, and Game room), and year-by-neighborhood fixed-effects, we find using a t-test that the CONQUAS scores for ECs are significantly lower than those for PCs (p-value < 0.01). Appendix B shows further details.

Source: “Hawaii Leaders Resent Vexing Problems Caused by Japanese Land,” by Paul Nussbaum, Chicago Tribune, October 15, 1989, https://www.chicagotribune.com/news/ct-xpm-1989-10-15-8901220466-story.html.

Source: “Curb Sought in Hawaii On Foreign Investment,” The New York Times, March 24, 1988. The then governor of Hawaii Democrat John Waihee, however, did not take Republican Frank Fasi’s advice.

One may also argue that in Hawaii back in the mid-1980s, a typical Japanese investor could be substantially different from a typical local home buyer. Therefore, the assumption of equal distribution in our model between outsiders and insiders may be inapplicable.

See, for instance, Thaler et al. (2013), Dayan et al. (2011), and Rozin et al. (2011).

See, for instance, Engbers et al. (2006) and Steenhuis et al. (2004).

One media article grades various cafeterias in Federal buildings as: F for Supreme Court Cafeteria; D for U.S. Department of Agriculture South Cafe and National Institutes of Health Clinical Center Cafeterias; C for The Cafe at State, U.S. Patent and Trademark Office Roundhouse Cafe, and Pentagon Dining Room. These grades are obviously bad. Source: “Well, fed: We try the food at U.S. government cafeterias,” by Jane Black, Washington Post, July 14, 2010, https://www.washingtonpost.com/wp-dyn/content/article/2010/07/13/AR2010071301472.html.

Source: “When the Government Goes to Lunch,” by Carole Sugaman, Washington Post, May 6, 1987.

United States General Accounting Office (1978) investigates the James Forrestal Building cafeteria and finds that it attracts tourists and non-federal employees. Given that the operator has been “subsidized,” a nearby private restaurant complained about unfair competition.

In May 2017, the Ombudsman issued an investigation report showing evidence that factory canteens usually serve outsiders. The report states “the personal experiences of the investigation officers of the Office of The Ombudsman (the Office) indicate that factory canteens are patronized many times by people who have never been asked whether they are factory employees.” The report can be retrieved from https://ofomb.ombudsman.hk/abc/files/DI405_ES_E-11_5_2017.pdf.

In lawmaker Tommy Cheung’s question and the written reply by the Secretary for Food and Health, Professor Sophia Chan, in the Legislative Council on January 23, 2019, Mr. Cheung voiced out the substantially low profits of factory canteens after the tightening of the policy enforcement. Source: https://www.info.gov.hk/gia/general/201901/23/P2019012300389p.htm.

Source: https://www.legco.gov.hk/yr97-98/english/counmtg/hansard/970820fe.htm.

For instance, one travel website writes: “You do not have to show your ID or even look like a student. Even tourists or backpackers can enter and enjoy gakushoku, as it is commonly referred to.” Source: “The Secret World of Japanese University Cafeterias,” by Johnny, Spoon and Tamago, March 20, 2014, http://www.spoon-tamago.com/2014/03/20/the-secret-world-of-japanese-university-cafeterias.

We downloaded the data from https://www.journals.uchicago.edu/doi/abs/10.1086/698747.

Specifically, this score is compiled by the Singaporean Building and Construction Authority (BCA) which independently evaluates the quality of new buildings throughout their construction. The CONQUAS scores are publicly available at the BCA website.

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Titel: Does Restricting Outsiders Always Lower Price and Benefit Insiders?
verfasst von: Tat-kei Lai
Travis Ng
Publikationsdatum: 19.10.2020
Verlag: Springer US
Erschienen in: The Journal of Real Estate Finance and Economics / Ausgabe 1/2022
Print ISSN: 0895-5638
Elektronische ISSN: 1573-045X
DOI: https://doi.org/10.1007/s11146-020-09797-y

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