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Chinese home buyers

It is incorrect to simply say (as Clive Hamilton does) that Chinese purchases of Australian homes disadvantage Australians because local consumers have to pay more for their homes.  The error lies in considering only the consumer surplus losses to local consumers but not recognising the gains in seller surplus to local sellers and the latter must be larger.  (A bit of price theory shows that the gains in seller surplus exceed the losses in consumer surplus).  It is true to say that wealth is distributed away from local home buyers to local home owners but there is an increase in total local wealth.  What is true is that if it is the case that foreign buyers are driving up home prices that Australia can do better than allowing free trade in housing by imposing an optimal tariff on home purchases by foreigners – an optimal export tax that reflects Australian monopsony power in its property markets. Hong Kong has a 15% tax on purchase by mainland Chinese and this has this “optimal tariff” type of effect.  Another reason for introducing such a tax might be to insulate Australia from the effects of a collapse in the prices of substitute Chinese housing assets which often seem to be caught up in a property bubble.  But this will limit the current windfall gains locals get from Chinese paying too much for Australian properties.

Whether you want your housing stock in the hands of foreigners is not really the issue.  If a Chinese pays a huge price for an Australian home then that can be used to build another home and, if the Chinese owner does not become a resident the first purchase will be most-likely be placed on the local rental market reducing rental costs in that market.  Whether Australia wants many more Chinese immigrants is, of course, an issue for immigration policy.  It is disconnected from the issue of whether we should have free-trade in our housing assets.

5 comments to Chinese home buyers

  • James

    Does this analysis change if we assume the supply of land is fixed? Or would a fixed supply of land only raise the optimal tariff price?

  • hc

    No James the main result doesn’t change at all – sellers still get gains that exceed losses to local consumers. Yes the optimal export tax will be higher since monopsony power goes up.

  • conrad

    None of that is really true, excluding people selling to rent, once you add things like stamp duty which are proportional to the cost of the house. The really winner here is the government.

    You might also want to add social costs too. If young people can’t get decent housing, then they won’t have as many children, they will live further away from work where affordable housing is (and hence be less productive) etc. . Of course, Chinese buyers are just one factor in that, and picking on them above other things like negative gearing, restrictive planning rules and so on is a bit silly.

  • Crocodile

    I see the connection with extending overall wealth. Is it really so simple. Surely the investment into houses comes at the expense of investment elsewhere. Deflecting investment away from industry into non productive assets has to eventually, over time, result in a loss of productivity as investment in advancing technology shrinks. Not so sure if this a good thing.

  • rog

    My understanding is that Chinese buyers are only active in a few areas and that any crowding out, if there is any, would be confined to those areas.

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