Introduction
The U.S. housing market is on fire. From 2019 to 2025, average home prices surged by 60%, according to the Harvard Joint Center for Housing Studies. But what fuels this price hike? A recent study from the McCombs School of Business highlights an unexpected factor: foreign investment.
The Impact of Foreign Capital
According to Caitlin Gorback, assistant professor of finance, the influx of foreign funds has exacerbated the rise in housing prices in areas with high concentrations of international buyers. Between 2011 and 2018, prices in neighborhoods with a significant proportion of foreign-born residents increased on average 6.7% more than in other areas of the same city, while supply grew by only 1%.
Why is Foreign Capital Flocking In?
The appeal of the U.S. market for foreign investors has been amplified by tax policies in other countries. In 2011, Singapore introduced a tax on foreign homebuyers, a move quickly mirrored by other nations. Seeking better opportunities, investors turned their attention to the U.S., one of the few countries without such taxes.
Supply Elasticity: An Inadequate Response
Supply elasticity, or the ability of builders to respond to price increases by increasing supply, was extremely low during the studied period. For every 1% increase in prices, supply grew only by 0.26%. This dynamic has helped keep prices high due to insufficient new construction.
Case Study: San Francisco vs. Charlotte
Consider San Francisco, where building new homes is notoriously difficult. Here, a 1% increase in prices leads to only a 0.06% increase in supply. In contrast, in Charlotte, North Carolina, the situation is different. Adding new housing is easier, allowing for better absorption of growing demand.
Consequences for Housing Affordability
This price surge is not confined to traditionally expensive markets. Even in cities where foreign investors are less prevalent, prices are rising faster than supply. This exacerbates the housing affordability crisis, a major concern for policymakers and urban planners.
Conclusion
Understanding the impact of foreign investments on the housing market is crucial for crafting effective policies. Measures such as taxes on foreign buyers could be considered to regulate the market and improve accessibility. Let's discuss your project in 15 minutes.