By Tyler Durden at ZeroHedge
Hot money flows into real estate have become an issue in some of the world’s largest markets, as prices have skyrocketed. As we’ve repeatedly noted before, China is experiencing massive capital outflows (even if technically, overnight the PBOC said that in the last month these flows reversed to inflows for the first time in 5 months), which have mostly targeted foreign real estate, especially that in major UK, US, and Canadian urban centers. The impact of this has been so significant, that something such as living in a box in someone’s living room has become reality for some unlucky people.
Countries such as the US and UK are finally taking long overdue steps to at least slow down this massive inflow of capital - which at least in the US is the equivalent of laundering money due to the NAR's exemption from Anti money laundering regulations - and it’s starting to take hold. What we are learning as a result of these actions is that the housing “recovery” is being exposed as being driven largely by foreign capital flight, and has nothing to do with underlying fundamentals improving.
A few days ago we discussed that although Manhattan’s median sales prices have increased, the underlying contracts signed in 2016 have pulled back. We pointed out that this was occurring just as the US Treasury started to crack down on “secret” buyers.
We now have another major city experiencing a pullback in demand for its property – once again as a direct result of Government action to dampen the impact of foreign investment. In London, as Bloomberg reports, demand has slumped so badly that developers are offering discounts of up to 20% for their newly constructed homes. And just as the case was in Manhattan, it’s a result of the UK putting in a speed bump. The UK recently increased taxes on those deemed to be purchasing a second home, specifically designed to slow the pace of overseas investment.
According to Bloomberg, the U.K. government’s plan to increase sales taxes on second homes in Britain will also apply to people who live abroad.
From April, buyers of second homes and buy-to-let properties in the U.K. will be subject to stamp-duty sales tax that’s 3 percentage points higher than those who are buying a home to live in, U.K. Chancellor of the Exchequer George Osborne announced in November. In deciding whether an individual is purchasing an additional home, the government will also consider assets outside the U.K., according to a consultation document published on Monday.
“This means that if someone is purchasing their first or only property in England, Wales or Northern Ireland, they may pay the higher rates if they own property outside these areas,” the document shows.
Demand from overseas buyers has contributed to a jump in London house prices, and off-plan sales abroad helped developers finance projects including Battersea Power Station. House prices in the city rose 7.7 percent in the year through October, according to the Office for National Statistics.
The takeaway, as noted above, is that the housing recovery has been driven primarily by a steady flow of foreign investment, and not necessarily the underlying economic fundamentals improving. You just have to dig a little deeper than the headlines.