Miami residential real estate prices are holding firm and even increasing despite the weak economy. The recovery appears to result in significant part from capital inflows from French, Venezuelans and other foreigners whose governments are ramping up their attacks on private wealth. With low interest rates, a weak dollar and relative safety from confiscation, residential property in the more cosmopolitan US cities is a financial haven for Europeans and Latin Americans.
However, it would be a mistake to confuse the current flight-capital driven recovery with the kind of growth in property values that occurs during robust economic expansions. In an expansion, increased capital investment and productivity boost business activity and incomes and thereby contribute to higher property values. This contrasts with the current depressed market where incomes and business demand are stagnant and foreigners on the margin are snapping up property at prices locals won’t or can’t pay. The foreign purchases benefit local sellers at the expense of local buyers who might otherwise have been able to negotiate lower prices. New capital comes in and on the whole we are probably better off than we were a couple of years ago, but it would have been better still if the increased property demand had been spurred by government policies that encouraged investment and growth. IOW it’s not that we are doing things right but that it’s worse elsewhere and we are benefiting from happenstance. The mass media, in their enthusiasm to promote a recovery narrative, tend to miss this point.
I just visited Washington, DC and was struck, as I usually am, with the boom-town feel of the place. It is bustling. Scan the skyline from the runway at Reagan Airport and you see multiple construction cranes. The streets are crowded. There appears to be no shortage of expensive cars. Restaurants seem busy. On a bike ride into semi-rural Maryland suburbs I noticed a lot of new residential development. Some of the one- and two-lane secondary roads are noticeably rutted, I suspect from construction truck traffic. The farm fields are gradually being subdivided. A sign on Route 28, a few miles out from the Shady Grove Metro station, advertises new townhouses “from the low 500s”. This in an area that’s probably a good hour from town during peak commuting periods (though in keeping with edge-city trends, many of the people who live in these new houses will probably work in the suburbs near where they live). There is no mystery as to what is going on. Part of it is zoning rules that arbitrarily limit residential development along the busy 270 corridor. But most of it is increased federal spending. As spending expands, more government workers and consultants are hired, more offices built, more goods and services purchased, more people move to the DC area. Of course they are building new houses. They are going to keep building houses as long as the government continues to expand.
As with South Florida, it would be a mistake in the case of DC to infer national economic recovery from local real estate trends. The capital that inflates property values in the DC area was taxed from elsewhere and comes at the expense of economic growth, as it is capital not invested in factories or drug development or other high productivity, high risk ventures. The DC boom is a boom in government. We will not be better off as a nation until we reduce federal spending to a point where DC area property values decline significantly and the local economy shrinks.