A few weeks ago local Channel 7 news ran a story about foreign investment in Colorado Real Estate titled: Foreign investors continue their real estate spending spree in Colorado. I am glad the producers included the word “continue” in their story as this is not a new phenomenon. Back in the late 1980’s my thesis for undergrad in Political Science was titled Direct Foreign Investment in Downtown Denver an era when Canadians were slowly divesting from commercial real estate downtown and surprisingly Europeans, specifically Germans were purchasing. Of note this was a time when our local economy was on the skids post oil boom in the mid 1980’s.
Also foreign investment in real estate within our mountain resorts is goes back to the development of our modern ski resorts with Vail and Aspen starting the trend and foreign investment can be seen throughout our mountain resorts.
Of note the article seems to focus on Denver and how foreigners are purchasing real estate at above market rates and thus placing additional stress concerning demand and by simple economics pushing prices higher. However the story did not look at the pitfalls of such investments concerning our local economy.
While many will suggest to look at Vancouver as a cautionary tale concerning foreign investment I could not agree more. With a large influx of Mainland Chinese buyers using Vancouver real estate as both an investment and monetary shelter it is not uncommon to see homes and flats vacant for most of the year. Yet due to this purchasing activity Vancouver has become unaffordable to many of the locals. The local government is pursued a speculation tax to address the issue. Other popular attractive destinations around the world including New Zealand seem to be following Vancouver’s lead to try to dissuade foreign buyers.
Yet on the flip side foreign buyers can also have disrupt segments of the market with nothing to do with affordability. In New York City condo towers presently under construction on Billionare’s Row* AKA West 57th Street believed the demand from foreign buyers specifically Russian and Chinese was sustainable; it’s not and losses happen. Related in New York City there is support for a pied-a-terre tax to provide capital for the city’s aged mass-transit system.
Even Mansion Global an influential read for those in the luxury housing market advises in a recent article how to attract foreign buyers in a slowing demand marketplace: Strategies for Sellers as Chinese Buyers Scale Back on Foreign Real Estate Investment.
Granted there are other macro economic forces at play as well including the value of the US Dollar against other currencies i.e. when the US Dollar is weak our real estate looks even more enticing to foreign buyers just as US based buyers flock to Mexican real estate when the Mexican Peso is weak.
Back to Denver; I would be concerned. At present we may have pockets of foreign money purchasing residential rental properties and thus may be adding stress to our already over-heated housing market (based on the divergence between local housing costs and local income levels). My concern is more macro i.e. if the US Dollar continues to strengthen or if there is a world-wide recession; foreign money can take flight as easily as it comes in.
While I do not believe foreign investment in Denver’s residential real estate market is a concern due to the limited capital investments against the full local real estate economy there are places in China now known as Ghost Cities where speculation’s negative extranalities are on full display.
* Full disclosure, I used to reside part-time in a co-op located adjacent to Billionaire’s Row. Our building actually sold our air-rights to the developer of adjacent 220 Central Park South. In the 13 years of ownership, when sold generated a profit of just shy of 500% partially due to timing and mostly due to luck.