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  • Real Estate: Flight Capital and Bigger Government

    Posted by Jonathan on June 28th, 2012 (All posts by )

    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.

     

    9 Responses to “Real Estate: Flight Capital and Bigger Government”

    1. Michael Kennedy Says:

      We saw something like this about 30 years ago when the Yen was booming. I knew people who sold their homes in Palos Verdes, a wealthy suburb of LA with ocean views, to Japanese investors who had mortgaged 400 square foot Tokyo apartments for enough to pay $700,000 for the California house. A few years later that market had collapsed. The most famous example was Pebble Beach, which was sold by Marvin Davis, an ex oil wildcatter, to Japanese for a huge sum, nearly a billion dollars. That was 1990. Ten years later, the course was back in American hands for less than the Japanese had paid. The Yen boom was over. For many of the same reasons the USA boom may be over, especially if Obama is re-elected.

    2. Tim Says:

      Yep. I work in DC and commute to West Virginia. Rte. 340 going from Maryland to Virginia (and then WV) is backed up pretty much every day at rush hour. This an hour and half away by commuter train. With today’s Obamacare ruling, expect more of the same.

    3. Sgt. Mom Says:

      I read of a suggestion once, that the various federal department headquarters ought to be dispursed all across the United States, perhaps to those cities which had been a traditional center for such activities: say, the Department of Commerce to New York City, the Department of Ag to De Moines (or somplace else in the agricultural mid-section), the department of Transportation to St. Louis, Defense and Veterans to any big military establishment town you could name, Treasury to Fort Knox. Let Washington keep State and Justice, and disperse the rest.
      It’s not a good thing – and it’s very untraditional for the US to have all the administrative and political power centered in one single place. If Washington is a boom town now, I’d like to see it go bust as soon as these boom towns most often do, historically.

    4. Whitehall Says:

      Here in Silicon Valley we’re seeing the housing market propped up with money from Asia.

    5. Robert Schwartz Says:

      As I wrote in a previous post: DC Zoning and Government Growth:

      ” … the country’s wealth and power are being concentrated in the Imperial Capital. The real problem is not building heights, it is the concentration of political power. I think we need a meme or slogan to carry us through to November, and through the subsequent campaign to re-establish constitutional government in the United States. So here is my suggestion:

      Vote Republican — Send the Recession to Washington

    6. Jonathan Says:

      Yes.

    7. Carl from Chicago Says:

      Agreed with this but the analogy is more far reaching.

      Other countries with productive economies are coming here and scooping up real estate because it seems impossibly cheap and is a good vacation spot.

      The extreme of this is London where prices are impossibly high and set by fleeing capital from Oligarchs and African dictators. The average Londoner can’t even think of living anywhere in a nice area because prices are impossibly high.

      To some extent we are a tourist economy or a place to invest profits created elsewhere. Likely the foreigners will start buying up land for agriculture as well, so they can grow food and vertically integrate to send it back.

      The one advantage we have as well is the right to bear arms and protect your family from kidnapping. This will be more and more highly valued from the completely unstable central and south American countries, and the other part more interesting to the overseas Chinese and Russians and the like.

      The US will eventually become a safe, well run tourism and offshore wealth location, with booming agriculture. We can all work at those jobs for wealthy foreigners.

    8. Jonathan Says:

      Yes, that puts it well. The question is what kind of country we want to be. If we want to be a high-productivity, high-growth dynamic country with expanding opportunity and wealth and a robust overseas stance driven by our national interests we are doing the wrong things.

    9. Michael Kennedy Says:

      “The average Londoner can’t even think of living anywhere in a nice area because prices are impossibly high.”

      Yes, this is illustrated by what happened to Notting Hill, which used to be a slum. The first time I went to London, in 1977, I went to Notting Hill because Portobello Road was the antique flea market. My wife’s parents, who spent a lot of time in London (My father in law was a member of the Army-Navy Club) had a whole antique collection from Portobello Road. By 1977, the bargains were gone. Then Mitterand was elected President of France and tried to socialize the economy. The capital flight was breath taking. He had to retract much of his program but the damage was done. I had friends who bought second homes in France, some small chateaux with significant amounts of land and vineyards.

      An ophthalmologist friend, who was one of the investigators of implantable lens and who, after using them a few times, mortgaged everything to buy stock in the company, Staar Optical, that made the soft lenses. As a result, he became rich before the age of 40. A few years ago, he told me that he had sold his London pied a terre after owning it for about 10 years. It was near Notting Hill. He said the profit from the sale exceeded his income from his practice that year.

      I was there a couple of years ago. There were few apartments for sale for less than a million US dollars.