Monday, July 18, 2005

Foreigners "buying up" U.S. real estate: not a problem at all

Our friend Steve Conover has debunked the unfounded fears of foreigners purchasing U.S. Treasury bonds. On a similar note, there's a great deal of alarmism about foreigners buying American real estate. Friday's Christian Science Monitor had an interesting article:

House not home: Foreigners buy up American real estate

In general, the article probably insinuates too much for good reporting. The most important thing to note is that the foreigners are primarily buying new property, so for the most part they're not displacing Americans. It's true that the increased demand generally drives up prices for everyone, but remember that high prices are an adjustment mechanism in themselves. If sellers ask prices that are higher than buyers are willing to pay, demand will fall off. Also, high prices encourage others to get into the business. The increased supply can temper prices, but another effect is that entrepreneurs can go forth with business ventures that before weren't profitable. That's precisely what's happening with the new construction. Without wealthy foreigners, American companies couldn't have made a profit by building these expensive buildings. There weren't enough rich Americans who could afford them and wanted them:
• In Las Vegas, wealthy foreign buyers - mostly from Mexico - have snapped up 12 percent of the condos at Icon, twin 48-story towers that are now almost sold out even though they won't start construction until next month.

• New York City real estate brokers estimate that up to 33 percent of new condos sold in the city are going to non-Americans, especially Europeans, who one broker describes as "very aggressive."

• Asian buyers are jumping in, too. Real estate agents are flying to Shanghai, Beijing, Bangkok, and Kuala Lumpur to talk up the property market. Recently, a large group of Korean finance, construction, insurance, and engineering executives conducted a "study tour" of southeast Florida real estate. They plan to return next April.
(emphasis added)

See that? Ground hasn't even been broken on some of the condos. We have the seen effect of higher housing prices, but there is also the unseen effect that the foreigners' money creates many well-paying jobs for Americans, from construction work to executive positions developing the real estate. Also, when wealthy foreigners move here, they necessarily buy goods and services as part of living, which creates more jobs for Americans. The higher property prices are more than offset.

One thing I refuse to consider is the tax revenues that foreigners pay while living here; I find that an immoral reason to want people to immigrate.

Now consider where foreigners get all that money to spend here. One primary source is the perceived "glut" in foreign savings, driven by foreigners' proclivity to save more than Americans. The reasons vary, depending on socio-economic conditions and government policies. The Chinese have a rapidly increasing national income but aren't increasing consumption spending at the same rate; this is changing as they enjoy more and more technology that the West pioneered, such as cars and cell phones. South Korea also has a rapidly increasing national income, but its government policies favor savings over consumption.

Then there are Japan and much of Europe, which are stagnant and have high unemployment (Japan's 5% seems low to us but is actually high for them). Consumers in such a situation, fearful of a probable (not just possible) "rainy day," will tend to save even more. Japan and much of Europe also have rapidly aging populations, far worse than the U.S. "baby boomers." So their people want to save even more for that, knowing future taxpayers can't support state pensions at current rates. And it doesn't help when much of western Europe has high tax rates and other inhibitive fiscal policies, which restrain consumers and businesses alike and reduce consumption spending from an optimal level. There can be such a thing as too much saving, which occurs when businesses have enough to borrow but not enough customers.

So foreigners save a lot, especially in U.S. assets. The U.S. economy has been very strong for over two decades, with only two minor dips, making it the economy for investment. Much ado has been made of China surpassing the U.S. in foreign direct investment ($61 billion in 2004), but FDI is only one measurement. Foreign investment also includes corporate and government bonds. Much of recent U.S. federal debt has been financed by China, Japan and South Korea, which of course dwarfs FDI in China, and indicates foreigners' massive confidence in continued U.S. economic growth. But massive foreign savings is a two-edged sword. In recent years, this has supplanted, not just supplemented, Americans' own savings. Intrinsically that's neither good nor bad, but the results are both good and bad. As foreigners provide more capital for U.S. businesses, Americans can save less and use that money for consumption spending. However, it's sustainable only while foreigners have confidence that the U.S. economy is the strongest in the world.

The second major source of foreigners' money: Americans. Many foreigners earn more money selling goods to us than they spend on goods we sell them, i.e. the trade "deficit." They save their dollars primarily in U.S. stocks, U.S. corporate and government bonds, and yes, U.S. real estate. After all, it does them no good to hold dollars when there are plenty of dollar-denominated investment assets. Perhaps foreigners want to exchange their dollars for other currencies? Well, those who "buy" dollars in exchange markets want to use the dollars to buy American products (or crude oil, which is usually sold for dollars) or invest in U.S. assets. (Currency speculators are an exception, but an exceedingly minor one.)

This is another reason why we shouldn't worry about a "trade deficit" per se: the dollars eventually come home, in one form or another. So when some charge that a trade deficit means we're exporting our wealth, it's just not true. Nor is it true when Terence Straub of the United States Steel Corporation said we're exporting jobs and our manufacturing base. I've explained in more detail in these two posts why a trade deficit isn't inherently the problem most people (including economists) think it is:

Worrying about the trade deficit

Walter Williams: the trade deficit is nothing to worry about

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