Foreign funds help make housing unaffordable
International investment and local rules push prices up faster than supply
It’s no secret that U.S. housing has gotten less affordable. From 2019 to 2025, average home prices rose 60%, according to the Harvard Joint Center for Housing Studies.
New research from the McCombs School of Business identifies a novel factor in rising prices: foreign investment. An influx of foreign money during the 2010s drove up housing costs in the areas with the greatest concentrations of purchasers from outside the U.S., finds Caitlin Gorback, assistant professor of finance.
But her findings have broader implications for affordability, she says. Even in markets where foreign investors weren’t plentiful, prices rose much faster than supply did from 2009 to 2018.
Supply elasticity — the rate at which builders respond to higher prices by putting up new homes — was much lower during that period than before 2000. For every 1% increase in housing prices nationwide, housing supply increased only 0.26%.
“The supply landscape in U.S. cities has changed meaningfully in the past 20 years,” Gorback says, adding that builders have not responded with sufficient supply to offset rising prices.
Capital Flight and Housing Costs
Foreign investment rose in the U.S. housing market after 2011, her research found. That’s when Singapore became the first country to implement a tax on foreign homebuyers, setting off similar measures in other countries.
Looking for a less costly country, many international buyers found the U.S. It was among the few with high immigrant populations and no such tax on foreign investment in housing.
Looking at the period from 2011 to 2018, with Benjamin Keys of the University of Pennsylvania, Gorback found:
- Housing prices in areas with more foreign-born residents averaged 6.7% higher than other neighborhoods in the same city.
- But housing supply grew only 1% in those areas.
Development Tales of Two Cities
The researchers extended their analysis to estimate supply elasticity for 100 large U.S. cities. They found the rate varied drastically from city to city, with consequences for both prices and supply. Gorback points to two cities as examples.
- In San Francisco, where it’s more difficult to create new housing, prices rise much faster than supply. A 1% increase in prices leads to only a 0.06% increase in supply.
- By contrast, it’s easier to add new housing in Charlotte, North Carolina, so increased demand generates more supply.
“In San Francisco, demand is reflected in increased prices,” she says. “In Charlotte, demand is reflected in increased quantities.”
The research demonstrates the importance of municipal control over housing, Gorback says. As people move back into urban areas, reversing the suburbanization trend of the latter portion of the 20th century, cities must find ways to promote affordable housing, such as revising zoning laws.
For example, the researchers calculated Baltimore’s housing market as the most elastic in the country. Upon further research, they saw that the city had overhauled its permitting process during the mid-2010s.
“A big takeaway is that cities are in control of a big portion of their supply sensitivity,” Gorback says. “It’s cities that control zoning. It’s cities that control permitting. The real keeper of the keys are the municipalities.”
“Global Capital and Local Assets: House Prices, Quantities, and Elasticities” is published in the Review of Financial Studies.
Journal
Review of Financial Studies
Article Title
Global Capital and Local Assets: House Prices, Quantities, and Elasticities
