The Ethics of Foreign Investment in Residential Property Markets: Australia, Canada and New Zealand

May 5, 2015

Abstract: Foreign investment is often touted as a driver of house prices, and a factor in unaffordable housing. This assertion raises the two questions. Firstly, does foreign investment have an impact? Secondly, if it does, is the government justified in intervening? To answer these questions, the article takes a case study approach to Australia, Canada and New Zealand and evaluates the issue according to background information, evidence foreign investment is driving house prices and a utilitarian based ethical analysis of government intervention. Although a lack of evidence makes it hard to draw real conclusions, there is a potentially small negative impact from foreign investment and if this outweighs any positive influences, then regulation is justified. With this conclusion, further discussion and research is recommended to ensure ethical policies are undertaken by governments.

Introduction

Debate rages about the importance of foreign investment into residential property markets. The accusation is levelled that foreigners are the culprits behind elevated house prices and by extension, creating a housing affordability crisis. Proponents of this view want government restrictions on foreign purchases. On the other hand, some maintain foreign investment is completely irrelevant to the problem of escalating house prices.

This raises two questions. Firstly, are foreigners having an impact on house prices and housing affordability? Secondly, is a government ethically justified in curbing foreign investment if foreign investment has an impact? Taking a case study approach to Australia, Canada and New Zealand, the impact from foreign investment is difficult to ascertain, but may have a small impact. Intervention can be justified if there is an impact.

The article is divided into three sections. The first section outlines problems facing these countries, particularly strastospheric house prices and unaffordable homes in urban areas. It also gives some information on current investment restrictions. This information helps provide context and explains why the issue is so politicised.

The second section addresses the real impact of foreign investment in residential property markets. It gives some measures of foreign activity in property markets and the main drivers of house prices and unaffordability according to research. Finally, it highlights the debilitating lack of data and research in the three countries.

The final section is dedicated to defending an ethical consideration of foreign investment in residential property markets. This section uses a utilitarian viewpoint to justify government intervention and refutes property rights objections. Furthermore, the section shows the importance of the topic by outlining the benefits of promoting housing affordability.

Daniel Strong has a degree in Political Studies and Economics at the University of Auckland, New Zealand.

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About the Journal

Moral Cents: The Journal of Ethics in Finance (Winter/Spring 2015)

Residential property prices in major cities around the world, from Shanghai to San Francisco, New Delhi to New York, Bangkok to Berlin, are hitting heights unreachable to ordinary mortals. Median house price increases outpace median family income growth, pricing out the young and the middle income. The reasons for the stratospheric rise of property prices in major cities around the world are undoubtedly many and interconnected. Yet, it seems easiest to blame global and mobile plutocrats for accumulating prime properties and pushing up prices in international cities. London locals blame rich Russian oligarchs for the million pound price tags on undistinguished flats, while Vancouverites suspect Chinese nationals are responsible for high property prices in their city.
Daniel Strong attempts to shine some light on the issue in his article, “The Ethics of Foreign Investment in Residential Property Markets.” He investigates if it is indeed wealthy foreigners who push up prices in local housing markets using data from three cities: Vancouver, Sydney and Auckland. He also makes a moral case for government intervention in the housing markets.
Lest we forget the players who contributed to the Global Financial Crisis, Shazia K. Afghan writes about Royal Bank of Scotland (RBS) and its Icarus like fall. In her article, “The Pursuit of Good Management, Governance and Culture”, Shazia reminds us why RBS failed so spectacularly and gives some policy recommendations for improving governance by company boards and non-executive directors.
Aryaman Basu gives a further reminder of the contributions “Too Big to Fail Banks” made to reducing trust in financial services through their bad behavior. In “An Analysis of Libor Punishments” Aryaman evaluates the punishments meted out to offending banks for their roles in manipulating Libor and concludes, as most of us perhaps already have, the punishments were pusillanimous and do little to prevent future misbehavior.
Kitty Wong highlights possibly alarming moral issues in life insurance products in her lightly titled article, “Some Ethical Issues in Joint Life Insurance”. This form of insurance may result in sinister motives behind harming others if an insurance policy reaches its maturity date without the death of any member of the insured party. Read on…
Sumil Thakrar contributes the final and thoroughly engaging article in this issue. The piece is entitled, “Applying Buddhist Ethical Principals in Markets”. The distinction between chanda, desire for things that sustain well-being and tanha, desire for things which do not sustain well-being but give sense-gratification, may inform our use of planetary resources. Perhaps the Buddhist tradition has some contribution to make in providing an alternative or a helpful addition to neoclassical economics.

Dr. Kara Tan Bhala
Editor

Moral Cents: The Journal of Ethics in Finance is published by
Seven Pillars Institute for Global Finance and Ethics
ISSN 2326-5663

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