Geography and Realty Prices: Evidence from International Transaction-Level Data

In this paper, we examine the role of international capital flows in real estate prices by quantifying the relationship between conditions in the location of residence or registration of investors or investment firms and the prices they pay for their realty investments as well as the spillover effect of such capital flows on property prices in the host countries of their investments. Using a unique dataset accounting for about 30,000 realty investment transactions in Australia, Canada, France, Hong Kong, Japan, the Netherlands, the United Kingdom, and the United States, we find the following. First, foreign investors pay significantly higher prices than domestic investors, even after taking a wide variety of controls into account. Second, the larger the buyers' experience with realty investments in the host countries, the smaller the over-payment tendency. These results indicate that foreign investors are overcharged when they are less informed about the property market and that the extent to which they are overcharged decreases with the more investment experience they have. Third, we did not find any significant spillover effects from overpaying by foreign investors to real estate prices in host countries. This finding is consistent with a group of extant studies employing aggregate-level data to examine the link between international capital flows and real estate prices.