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The Journal of Real Estate Finance and Economics

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01-02-2015

Housing Markets with Foreign Buyers

Authors: Chi-Chur Chao, Eden S. H. Yu

Published in: The Journal of Real Estate Finance and Economics | Issue 2/2015

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Abstract

There are cities in the world which have experienced substantial numbers of foreign buyers in the local housing markets, thereby pushing up the real estate prices to the levels beyond the affordability of local residents. To suppress foreign influences in the forming of housing bubbles, governments have resorted to short-term measures of stamp duty or raising the duty rate for non-local buyers, increasing down payments and restricting or even forbidding non-local purchases. These new measures may help contain the demand for housing, but short of being the first-best optimal housing policy for an open economy with significant non-local and foreign buyers. We argue that the first-best policy is to tax non-local and foreign buyers and then use the tax revenue generated to subsidize domestic low- and middle-income buyers. The optimal tax rate under this compensated scheme is smaller than the tax rate under the lump-sum transfer of tax revenue to all residents.

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Hong Kong is even more densely populated than Singapore that has a population of more than 3 million with a land area of 648 sq km. In Singapore, more than 80 % of the people stay in public housing.

This important new factor of foreign purchase on housing demand was non-existent a decade ago. See the early studies on the Hong Kong property prices, e.g., Chou and Shih (1995).

Tourism is another notable example in transforming non-traded goods into tradable.

On the top of the current stamp duty, a special stamp duty (SSD) of 5–15 % was imposed after November 20, 2010 for the residential property sold within 24 months of purchases.

That is, housing is treated as a non-traded good. See studies by Komiya (1967), Batra (1973), Beladi and Batra (2004) and Beladi and Oladi (2011) on salient features of non-traded goods.

See Jones (1971) and Neary (1978) for applications of models of specific factors in the theory of international trade.

By normalizing housing expenditure of each foreign buyer to unity, their total demand for housing is C ₂ ^∗ (p,α) = α/p.

The stability analysis is provided in the Appendix.

Note that Δ _τ = S _τ − (1 + τ ^∗)(m/p)[C ₂ ^∗ + τ ^∗ p(∂C ₂ ^∗ /∂(1 + τ ^∗)p)] > 0 is required for stability, in which S _τ = R ₂₂ − E ₂₂ − (1 + τ ^∗)(∂C ₂ ^* /∂(1 + τ ^∗)p) > 0.

The formula for computing the optimal tax rate resembles that for optimum tariff (cf., Caves, et al., 1996, p. S-43).

Using (8) and (9), we obtain: E _u(du/dV) = − R ₂ R _V(1 + ε − ε ^*)[ρ ^* − (η + ε)/(1 + ε − ε ^*)]/pΔ, where ε ^* < 1 + ε by stability. In addition, ρ ^∗( = C ₂ ^* /R ₂) is the ratio of domestic housing bought by foreigners. Hence, the condition for du/dV < 0 is: (η + ε)/(1 + ε − ε ^*) < ρ ^*.

In the literature, this is referred to as the cash-in-advance constraint. See Stockman (1981).

Hong Kong has adopted the linked exchange rate system to the U.S. dollar since 1983, resulting in her interest rate to follow closely with the U.S. interest rate. Thus, Hong Kong has no monetary policy.

Note that Δ _ϕ = (1 − tm)S _ϕ − (m/p){(1 + s ^∗)[C ₂ ^∗ + s ^∗ p(∂C ₂ ^∗ /∂(1 + s ^∗)p)] + s(1 + s)pE ₂₂} > 0 and S _ϕ = R ₂₂ − (1 + s)E ₂₂ − (1 + s ^∗)(∂C ₂ ^∗ /∂(1 + s ^∗)p) > 0.

During 2010, the ratios of domestic households in Hong Kong live in public rental housing, subsidized sale flats and private housing are respectively 31.6 %, 16.7 % and 50.9 %.

See Weibull (1983) for a related study on a housing market with both private and public housing, in which the public housing price is fixed. Phang and Wong (1997) applied the Weibull model to study the Singapore housing market.

The public housing units in Hong Kong have been fully occupied.

We need to have that Δ _s = (n/q)(p − q)S _s + (n/q − m/p)[H ₂–t ^∗ C ₂ ^∗ − t ^∗(1 + t ^∗)p(∂C ₂ ^∗ /∂(1 + t ^∗)p)] − (m/p)(n/q)(p − q)(H ₂ + C ₂ ^∗ ) > 0 for stability, where S _s = R ₂₂ − E ₂₂ − (1 + t ^∗)(∂C ₂ ^∗ /∂(1 + t ^∗)p) > 0.

It is noted that t ^* o = 1/[(1 + B)ε ^* − 1] < τ ^* o = 1/(ε ^* − 1), where B = (n/q)C ₂ ^∗ /(n/q − m/q)H ₂ > 0.

Batra, R. (1973). Nontraded goods, factor market distortions, and the gains from trade. American Economic Review, 63, 706–713.

Beladi, H., & Batra, R. (2004). Traded and nontraded goods and real wages. Review of Development Economics, 8, 1–14.CrossRef

Beladi, H., & Oladi, R. (2011). An elementary proposition on technical progress and non-traded goods. Journal of Mathematical Economics, 47, 68–71.CrossRef

Case, K., & Shiller, R. (1990). Prices and excess returns in the housing market. Real Estate Economics, 18, 253–273.CrossRef

Caves, R. E., Frankel, J. A., & Jones, R. W. (1996). World Trade and Payments: An Introduction (7th ed.). Harper Collins: New York.

Chou, W. L., & Shih, Y. C. (1995). Hong Kong housing markets: Overview, tenure choice, and housing demand. Journal of Real Estate Finance and Economics, 10, 7–12.CrossRef

Dei, F. (1985). Voluntary export restraints and foreign investment. Journal of International Economics, 19, 305–312.CrossRef

Glaeser, E. L., J. Gyourko and R. E. Saks (2004) “Why have housing prices gone up?” Taubman Center Research Working Papers Series, WP 05–09, Harvard University.

Jones, R. W. (1971). A three-factor model in theory, trade, and history. In J. N. Bhageati et al. (Eds.), Trade, Balance of Payments and Growth (pp. 3–21). Amsterdam: North-Holland.

Komiya, R. (1967). Non-traded goods and the pure theory of international trade. International Economic Review, 8, 132–152.CrossRef

Neary, J. P. (1978). Short-run capital specificity and the pure theory of international trade. Economic Journal, 88, 488–510.CrossRef

Phang, S. Y., & Wong, W. K. (1997). Government policies and private housing prices in Singapore. Urban Studies, 34, 1819–1829.CrossRef

Stockman, A. C. (1981). Anticipated inflation and the capital stock in a cash-in-advance economy. Journal of Monetary Economics, 8, 387–393.CrossRef

Weibull, J. W. (1983). A dynamic model of trade frictions and disequilibrium in the housing market. Scandinavian Journal of Economics, 85, 373–392.CrossRef

Title: Housing Markets with Foreign Buyers
Authors: Chi-Chur Chao
Eden S. H. Yu
Publication date: 01-02-2015
Publisher: Springer US
Published in: The Journal of Real Estate Finance and Economics / Issue 2/2015
Print ISSN: 0895-5638
Electronic ISSN: 1573-045X
DOI: https://doi.org/10.1007/s11146-014-9454-3

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