In July, the National Association of Realtors® (NAR) released its annual report detailing international transactions in the U.S. residential real estate market – and the outlook for New York is not so good.
The data from this year’s NAR report shows that New York still ranks among the top 10 states for total foreign buyer purchases, but dig deeper into the data to see that the percentage of real estate sold to foreign investors in New York has stagnated and declined over the last five years. Instead, investors have flocked to cities in more favorable sun belt states like California, Texas, Florida and Georgia.
It may be easy to explain away this change: the slow pace of new construction, not enough attractive inventory for foreign investors, capital controls in China, restrictive short-term rentals and the impact of high interest rates vs. rental income (negative cash flow). These factors certainly have some influence over the trends specific to New York – the NAR report unfortunately does not go this deep. Maybe it should.
But these issues exist nationwide. So, what’s happening in New York that makes it less and less attractive to foreign investors? Unfavorable landlord laws, a significant hurdle for foreign investors, expensive closing costs are more pronounced in New York.
Consider the problem from a foreign investor’s perspective:
Even well-qualified foreign investors encounter financing complications with banks and mortgage brokers, long timelines across time zones and a strengthening U.S. dollar reducing their buying power. It’s an even bigger hurdle for upstart, solo and first-time foreign investors who want to put their money into the market but have to navigate these landmines for the first time.
In New York, the challenges compound. Housing policies that restrict the use, income, or renovation of properties, such as rent controls and zoning laws, are not landlord friendly and slow the growth in housing stock. In one of the highest cost markets with some of the most complex housing laws, these risks are magnified. All of these challenges are felt more acutely by foreign investors and are driving them to other markets.
Until recently, New York was trending towards a more market-based system, with rent stabilization laws mostly unchanged and rent controlled stock moving to market rates, but the Housing Stability and Tenant Protection Act of 2019 (HSTPA) slowed down this progress. The legislation locked more units into rent-control and added more rent stabilization rules, making an already complex real estate market more challenging to navigate.
It’s interesting to see this impact reflected in the NAR report’s data: HSTPA took effect mid-way through 2019, the percentage of foreign investors in New York peaked in 2020, and that number has been on a steady decline ever since.
The policies passed by state and city lawmakers over the last five years – or, in the case of Gov. Hochul’s New York Housing Compact, not passed – have sought to make the market more equitable. It’s important to have laws that protect tenants’ rights, but lawmakers need to find a way to balance these measures without driving away (foreign) investment dollars or reducing incentives to build more housing.
Foreign real estate investors still represent $42 billion of purchase volume and are a material part of the market that must be considered by policymakers if we’re to see growth in housing stock.
Foreign investment can help drive that growth, but they’re not coming here if New York keeps creating more hoops for foreign investors to jump through.
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