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It’s time to tax foreign homebuyers

In one of the most unaffordable cities on earth, overseas cash drives prices higher

On April 24, 2017, a three-bedroom, two-bathroom house located at 1531 25th Avenue in San Francisco’s Outer Sunset district sold for $1.55 million — a half-million over the asking price of $995,000. The listing agent, Jason Chan of Barbagelata Real Estate, told SFGate that the open houses were slammed, with “40 to 50 people packed into the home at a time.” The accepted offer was all-cash with a five-day close (meaning no contingencies), and it was the second highest offer. You read that right — someone else bid even more than $1.55 million to live on a street that is shrouded in fog most of the year and has so much traffic speeding down it you could swear it was a freeway. No offense, Outer Sunset dwellers, but I’m not even a huge sun lover and it’s too dismal there for me. So who would spend an outrageous sum of money for an average house in the middle of a desolate haze? Because real estate professionals are often under multiple nondisclosure agreements, and due to the fact buyers aren’t required to disclose their citizenship or residency status on escrow or closing documents, it’s hard to say for sure, but all the signs — overbidding, all cash purchase, five-day close — point to a foreign buyer.

While the latest headlines tout a slowdown in foreign real estate investments, that’s debatable. According to a report from the National Association of Realtors (NAR), foreign buyers spent an astounding $102.6 billion on residential property in the United States from April 2015 to March 2016, a slight decrease from the $103.9 billion in the previous 12-month period. But the number of properties purchased increased 2.8 percent to 214,885 as international shoppers turned their attention from the luxury market to less expensive properties, likely due to overall higher home prices and a stronger U.S. dollar, putting them squarely in competition with middle-class Americans. “While these obstacles led to a cool-down in sales from nonresident foreign buyers, the purchases by recent immigrant foreigners rose, resulting in the overall sales dollar volume still being the second highest since 2009,” said NAR chief economist Lawrence Yun.

Five states accounted for 51 percent of total residential property purchases: Florida (22 percent), California (15 percent), Texas (10 percent), Arizona (4 percent), and New York (4 percent). With $27.3 billion spent, Chinese purchasers exceeded the total of the next four ranked countries combined.

If the 2017 annual survey of overseas investors by the Association of Foreign Investors in Real Estate (AFIRE) is any indication, foreign buyers are still extremely enamored, with 95 percent of respondents saying they planned to increase or maintain their level of U.S. investment due to a lack of suitable global alternatives and a proven track record of steady returns generated by American real estate. In the AFIRE survey, New York City ranked as the top investment market for the seventh consecutive year, as well as the top city for foreign capital for the third year straight. Los Angeles came in second, followed by Boston, Seattle, and San Francisco. While Berlin placed second among global cities, San Francisco wasn’t far behind, coming in a close fifth after London and Los Angeles.

U.S. cities aren’t the only ones dealing with inflated home prices due, in part, to foreign buyers — Vancouver ranked 15th out of 17 in a 2016 Conference Board of Canada report on housing affordability, with only Shanghai and Hong Kong rated worse. Just behind Vancouver were Singapore, Sydney and, you guessed it, San Francisco. On Aug. 2, 2016, Canada implemented a 15 percent property transfer tax on foreign nationals and overseas corporations buying residential real estate in the metro Vancouver area. Vancouver, which took in the equivalent of 760 million American dollars in foreign funds over just five weeks, was attempting to bring skyrocketing prices back to earth following intense pressure from local residents unable to compete in a city where the price of an average detached home rose 38 percent in one year.

“While investment from outside Canada is only one factor driving price increases, it represents an additional source of pressure,” British Columbia Finance Minister Michael de Jong said, adding that the additional tax on foreign purchases would “help manage foreign demand while new homes are built to meet local needs.” At the beginning of 2017, Vancouver Mayor Gregor Robertson also imposed a tax equal to one percent of a property’s assessed value on residences that aren’t rented out or lived in by the owners. Robertson said these homes should be classified as business holdings and treated as such. Net revenues from the Empty Homes Tax are reinvested in affordable housing initiatives.

In recent years, Australia, Hong Kong, and the U.K. have also imposed levies and restrictions on foreign buyers in an attempt to cool their housing markets, and I think it’s time for San Francisco to follow suit. As de Jong said of Vancouver, foreign buyers aren’t the only source of pressure on the city’s housing market, but they’re certainly not helping. In a survey by East-West Property Advisors, a U.S. real estate advisory firm that connects Chinese buyers with U.S. agents, Chinese buyers said they were most interested in the San Francisco Bay Area (34 percent), with New York City a distant second (22 percent). An entire cottage industry within the real estate business has sprung up around Chinese buyers in particular. Pacific Union, for example, established a Chinese Service Concierge Desk. Their statistics show 20 percent of buyers in San Francisco have Chinese connections.

Foreigners often purchase homes sight unseen, considering San Francisco simply a place to park their money, and sometimes to launder illicit funds. In 2016, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) completed an initial investigation into properties located in Manhattan and Miami-Dade County that showed more than 25 percent of transactions involved a “beneficial owner” that is also the subject of a “suspicious activity report,” leading FinCEN to expand the investigation to all of New York City, Los Angeles, and San Francisco.

It’s also no secret that many foreign nationals rent their investment properties out on Airbnb or leave them totally empty, thus taking valuable housing stock off the market in a city in the midst of the worst affordability crisis in its history. While there are certainly other factors at play like the latest tech boom and decades of not building enough housing, the appetite of foreign buyers is something I believe San Francisco can actually control to some degree, and fairly quickly.

It seems to be working in Canada. The Real Estate Board of Greater Vancouver announced that in the month following implementation of the foreign buyer and empty home taxes, sales were down 26 percent compared to one year ago, with detached homes decreasing 44.5 percent, signaling a return to more typical levels. It also may be having an unintended consequence in Washington: The real estate website Curbed reported that searches from China for Seattle real estate jumped by more than 140 percent, and by the end of 2016 nearly half of all luxury homes sold in the Seattle and Bellevue area were to foreign buyers, up from just a third the previous year. According to the National Association of Realtors, Chinese money now accounts for 55 percent of all homes purchased by foreigners in Washington.

So will Seattle lawmakers be pressured into passing a foreign buyers tax? If housing for residents reaches crisis levels, I presume so. Here in San Francisco housing for residents reached crisis levels a long time ago. A foreign buyer tax won’t solve the issue, but it might put a dent in it. Plus, with City Hall struggling to get by on that paltry $9 billion budget, every tax dollar counts.

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