Local Poison: Foreign Investment And Short-Term Rentals

Who will buy this US$3.8 million New Zealand penthouse?

In the good old days, the wealthy used to scoop up gold and jewels and flee in the dead of night before poor, angry peasants descended upon their estates. Today, the million-dollar jewels are often red carpet loans where today’s décolletage is rented like a yesteryear billboard.

Hiding assets from pillagees, modern-day pillagers have offshore banks, blind trusts, LLCs and cryptocurrencies. Fleeing is now the purview of private jets to far-away lands – but the local residents in those faraway lands are getting ticked-off at being priced out of their own markets and they’re mobilizing.

Last month, New Zealand passed a law banning many foreigners from purchasing existing homes. The legislation was part of a promise during Prime Minister Jacinda Ardern’s campaign in 2017 to reduce the country’s skyrocketing housing prices. Earlier in the year The New Yorker published a story about super wealthy Americans purchasing New Zealand real estate as a hedge against potential political or nuclear Armageddon – nicknamed “apocalypse insurance.”

Why New Zealand?

It’s a very remote first-world country in the southern hemisphere that’s inoffensive in global politics. Should a nuclear war break out, it will likely be in the northern hemisphere, where global wind patterns would keep the fallout well north of New Zealand (at least that’s the hope).

In 2016, 1.16 million acres were purchased by foreign buyers – 3.2 percent of all New Zealand farmland – a six-fold increase in one year. For local New Zealanders, homeownership rates have plummeted. In 1991, half of adults owned a home, by 2016 the rate had dropped to a quarter. Many who question the legislation point to just three percent of 2016 property transfers were listed as having foreign tax residency. But the three percent figure doesn’t include transactions where true ownership has been masked (trusts, LLCs, etc.) – a favorite tactic among the secretive wealthy as the Panama Papers showed.

But the law is far from perfect. First, it only covers existing property. New construction is exempt with large condo projects allowing for up to 60 percent foreign ownership. Australians, a large portion of overseas buyers are also exempt as are Singaporeans due to a trade agreement (New Zealanders are also exempt from Singapore’s 15 percent tax on foreign real estate purchases as they try to cool their market). It would, however, knock out the country’s largest investor, China (unless they want a condo).

That said, there is some minor early encouragement. In August, the Real Estate Institute of New Zealand reported that while prices outside Auckland increased eight percent year over year, the nation’s largest city only showed a 0.2 percent rise. Auckland’s median price is NZ$852,000 (US$558,000) – doubling in the past decade and nearly double the rest of the country’s current NZ$455,000 average (US$298,000).

The ultimate success of cooling an overheated market where several parts of the small nation have seen annual increases of up to 42.6 percent is unknown. The small gains in high-priced Auckland may point to smaller money moving out for better deals. It could also signal the new ban had already begun to shift cash away from areas of existing housing. It’s too soon to tell.

Also, Airbnb has named parts of New Zealand in its most popular destinations list. This adds another type of pressure as investors buy homes expressly to market them as Airbnb listings. Since daily rentals generate a lot more income than traditional yearly leases, buyers can pay more and drive up local housing costs. Cities are starting to crack down on these types of rentals.

How many investor properties are empty each night in Vancouver?

VANCOUVER, CANADA

Canada’s prettiest city has been under pressure longer than most. In the lead-up to the 1997 handover of Hong Kong to China, wealthy Hong Kongers began snapping up Canadian real estate as an escape valve in case Chinese rule was unpalatable. Both Canada and Hong Kong were part of the British Commonwealth making emigration easier. In more recent years, Vancouver’s beauty began attracting the Airbnbs of the tourism world. The result has been an agonizing increase in housing costs that price locals out of the market and entice builders to build investment housing instead of reasonably-priced homes for local residents.

In 2017, the city instituted an empty home tax of one percent on non-primary residences that are vacant more than half the year. Every property owner must declare their property’s status annually. Dovetailing with that, all short-term rental properties (estimated at 6,600) must also register and pay an annual CN$49 license fee. Short-term rentals are only allowed in a primary residence (occupy at least six months and pay taxes). It’s believed the requirements will force investors owning an “Airbnb house” to either sell or rent to long-term tenants. Those not registering face a C$1,000/day fine.

New Zealand’s foreign ownership ban has caught Vancouver’s attention.

Even in early morning, Venice’s St. Mark’s Square is crowded

AIRBNB INVESTMENT PROPERTY

Many cities globally are facing a housing shortage made worse by short-term rentals (Airbnb, et al). In addition to removing a long-term housing unit from the local pool, and often ticking off the neighbors, the short-term rental craze is also decimating the specialness they tout.

In 1950 there were nearly 180,000 residents in Venice, Italy. Today there are 53,000. Airbnb named Venice the global capital of mass tourism with 73.8 tourists for every local Venetian (three percent were Airbnb). The company claims that because many of their listings are in less crowded neighborhoods, they’re actually providing a service that decentralizes.

The flipside is that neighborhoods are where residents live and Airbnb is pricing them out – 1,000 residents leave per year. The Guardian noted one example where a 2016 rent increase from €800 to €1,500 per month turned a family into squatters in an unoccupied home. Airbnb’s much higher revenue potential drove the rent increase.

It’s so serious, there’s even a group called Assemblea Sociale per la Casa that identifies and repairs abandoned properties for the displaced who do not want to leave their city. They have rehabbed 70 apartments in their six years that are occupied by 150 people.

Venice, Barcelona and cities across Europe have hosted anti-tourism marches protesting the unrelenting rise in tourism from traditional purveyors (hotels and cruise ships) and the short-term providers like Airbnb.

Airbnb’s own research reports that their travelers are trying to go local in their travel – to “experience” how local residents live their daily lives. But how can local flavor be maintained when residents are overrun by an ant hill of Instagramers aching for social media hipness? Unending selfies capturing the “authenticity” of buying a cabbage so fresh there’s still dirt on it? Their very presence extinguishes the realness they’re breathlessly trying to capture as their Airbnb apartment removes another resident from the neighborhood.

BERMUDA: TWO-TIERED PROPERTY MARKET

Bermuda is a country with a two-tier system of homeownership that may offer ideas for overheated markets. There is one market for Bermudian citizens and another for foreign owners/investors. In short, citizens can purchase any property on the island while foreign owners can only purchase properties over a certain threshold (based on the amount of rent the property would generate). This keeps an affordable market out of the hands of investors.

When I last wrote about Bermuda, this translated into foreign investors purchasing single-family properties over $3.5 million and condos over $550,000. A license fee is also required, equal to 12.5 percent of a single-family home’s purchase price or eight percent for a condo. Non-citizens are also only able to own one property. If a second property is purchased, the first must be sold within a year. It a non-Bermudian inherits a home, they too must sell it within a year.

These rules aim to keep a lid on speculative pricing for Bermudians. Airbnb lists 210 whole house/apartment listings in properties that seem within the foreign buyer price bands.

Cookie-cutter “authenticity.” Niido conversion of Nashville’s Olmstead

REAL ESTATE ASSET PARKING AND SHORT-TERM RENTALS ARE POISON

Overheated real estate markets face multiple whammies from wealthy buyers parking cash to investors and homeowners looking to cash-in (for profit or need) from short-term rentals. It’s been estimated that there are 50,000 empty dwellings in London while the homeless go unserved and London residents are priced out. Many are held by investors to launder money or as an escape hatch.

The world over, developments are being constructed whose sole purpose is to cater to these wealthy buyers at the expense of local residents. I’ve been in “full” high-rises with 10 percent occupancy – on a good day. They suck the life out of the surrounding area they’re supposed to be making vibrant while high-margin construction to cater to them instead of local residents.

Developers like Newgard Development Group are also seeking to cash-in on Airbnb. Their Niido Powered by Airbnb concept began in 2017 to purchase existing apartment buildings that then encouraged full-time residents to place their units on Airbnb. In exchange, Newgard/Niido take a 25 percent commission. By 2019 they plan 14 Airbnb complexes. Existing residents are furious.

Whether it’s a neighborhood overtaken by short-term rentals or whole buildings, when does an area just become another kind of tourist-trap hotel?  When are travelers looking for “Facebook experiences” and “Instagram authenticity” going to figure out eating at a “super-secret, local’s only” café in Venice is a sham when the only conversations overheard are in English?

The only winner is the one taking the cash.

 

Remember: When I’m not stirring up trouble in Dallas, Texas or Honolulu, Hawaii for Candysdirt.com and SecondShelters.com, I’m off scouting interesting locations for a second home.  In 2016, 2017 and 2018, the National Association of Real Estate Editors recognized my writing with three Bronze (2016, 2017, 2018) and two Silver (2016, 2017) awards. If you’re a Realtor with second home clients who’d like me to feature their journey, shoot me an email sharewithjon@candysdirt.com. Be sure to look for me on Facebook and Twitter. You won’t find me, but you’re welcome to look.