UNITED STATES - The residential market in the US is recovering, but foreign investors will not be placed to capitalise on opportunities unless government tax restrictions are lifted.
Deutsche Bank's chief economist John Hooper told a conference in London that the US housing market had already seen a significant bounce, with growth of 5.6% at end of 2009.
Describing recent consumer spending growth of 3% as "quite impressive", he said there was substantial room for growing pent-up demand. A likely 200 basis point increase in US mortgage rates would be "painful", but would not kill the housing market.
Hooper presented a moderate growth scenario and said the recovery would be boosted by both fiscal stimulus and the end of the inventory cycle. He added that with much of the surplus housing stock worked through this year, 2010 would see some growth in the residential property market - though it would be held below the norm in what remains a relatively depressed housing sector.
The S&P/Shiller Home Price Index, published yesterday, showed price decline slowing in February for both the 10-city and 20-city composites. Annual change rates for the two composites were positive for the first time since the end of 2006, with a 1.4% rise for the 10-city and a 0.6% rise for the 20-city index. However, S&P pointed out that all-time lows in six cities pointed to a risk that the market could have further to fall.
However, despite evidence of a nascent recovery - at least in some markets - Steve Renna, CEO of the US National Association of Real Estate Investment Managers (NAREIM), warned that restrictive taxation on foreign investors in the real estate market would starve US real estate of much-needed capital. Under current regulations, foreign investors in the US property market pay capital gains tax, income tax and a withholding tax - even if they make a loss.
"It's an onerous tax regime for foreign investors," said Renna. "But when you put the tax provisions into law, and then try to rescind them, it's like trying to un-ring a bell. It's easy to say: ‘Hey, we should tax foreigners.' It's harder to say: ‘Hey, we should support lower taxes for foreigners.'
"No-one wants to back tax breaks for foreigners," he added. "Basically we have to convince a small number of key lawmakers to include it as part of the job stimulus or another, similar piece of legislation. If it gets in the bill and it isn't high-profile, we might be able to move it along."
He pointed out that current regulations effectively act as a barrier to entry for sovereign wealth funds in a position to invest capital into US real estate, which would help the US real estate industry recapitalise its loans.
"It clearly has a chilling effect on the market and isn't helpful at all. The impact is not that it has stopped all investment but that it doesn't encourage new investment," he said.
"We're losing out on foreign capital that is going to other countries. We have a global economy and we need to think globally. The problem is that politicians are elected locally. Therein lies the challenge."
