The short term benefits and long term detriments of international buyers in the U.S. market

International investors in the real estate market has been something of a hot topic over the past few years. Since the housing market crash, foreign investors have swooped in to grab cheap real estate in areas such as Vancouver, New York, California and Florida, a trend that has only been growing stronger in recent years, with more than $104 billion dollars in international sales from April 2014 to March 2015. While on the surface, a large injection of foreign money into local economies is a good thing, there’s a dark potential within these substantial cash investments.

The biggest gains for those in popular cities for overseas investment come for those who already own existing property. With demand soaring, homeowners can stand to make a profit off the market. The demand also encourages growth, driving developers to break new ground for both residential and commercial buildings, creating a stronger economy for the region.

However, one of the most disturbing trends is how this type of demand can force prices sky high, all while the local population’s income and status remains the same – a trend that has been particularly striking in Vancouver’s housing market. Buying houses, as a result of that foreign demand, can become impossible for the native population, turning ownership of a home into a luxury rather than an expectation. That forces them to turn towards renting, which in turn creates a rise in rents due to the demand. In a way, international real estate has the potential to create new housing bubbles that can quickly spiral out of control.

Australia, United Kingdom Pave Way for Market Protection

While foreign investment has saved cities like Miami from the housing crisis, thanks to cheap foreclosed properties, all it takes is something like the dollar strengthening to threaten to push all that money elsewhere, leaving cities with a foreign-funded bubble ready to burst.

The government of China is cracking down on smuggling currency out of the country. By law, Chinese residents cannot exchange more than $50,000 in foreign currency per year. Considering Chinese investors alone spent $28.6 billion in 2014 on real estate in America, with an average sale cost of $590,826, that would seem to make most of these luxury purchases done with illicit funds. To further enforce its currency exchange law, the Chinese government has moved to replace corrupt officials who allow money smuggling to happen, along with attempting to recover offshore assets, including luxury foreign properties.

In addition, other countries have lashed back at the substantial foreign investments. Australia has developed plans to impose a tax on foreign property buyers after Chinese investment in Australian real estate grew by 60 percent last year. The United Kingdom has also made similar changes over the past three years to protect their own markets. A Change.org petition, which asked the Canadian government to protect its citizens from the byproducts of international investing, garnered 25,000 signatures.

In 2011, Chuck Schumer, a senior senator from New York, introduced a bill that would grant foreign investors a three-year visa for investing $500,000 in a home and living there for 180 days, in order to force investors to pay federal and property taxes. The bill didn’t make it to the floor.