Thursday 21 August 2014

Foreign buyers and property markets

[Posted by Prof Henry G. Overman]

In May last year, I did some back of the envelope numbers on the role of foreign buyers in driving the London property market. On the basis of a very quick calculation I concluded that "domestic sources of demand (including from first time buyers) are much more important in understanding the overall London property market than a small number of rich foreigners."

I haven't revisted these numbers, but was interested to read the following in Thomas Piketty's Capital (p463-4):

The rich countries are not about to be taken over by the poor countries, which would have to get much richer to do anything of the kind, and that will take many more decades.

What then, is the source of this fear, this feeling of dispossession, which is partly irrational? Part of the reason is no doubt the universal tendency to look elsewhere for the source of domestic difficulties. For example, many people in France believe that rich foreign buyers are responsible for the skyrocketing price of Paris real state. When one looks closely at who is buying what type of apartment , however, one finds that the increase in the number of foreign (or foreign-resident) buyers can explain barely 3 percent of the price increase. In other words, 97 percent of today's very high real estate prices are due to the fact that there are enough French buyers residing in France who are prosperous enough to pay such large amounts for property.

This is certainly in line with my priors but I'd love to see similar calculations for London.

[The source for the precise 3% figure is a PhD thesis that proved to be beyond my (miserable) French - I'm not aware of anything similar for London].