When Lawrence Yun, chief economist with the National Association of Realtors, saw the annual stats on residential real estate purchases by international buyers at the end of the first quarter of 2017, he couldn’t help but be surprised. Despite rising home prices and a stronger U.S. dollar, foreign buyer transactions in the United States had increased dramatically from a year ago — by almost 50%, in fact.
“Overall the report was somewhat surprising,” Yun said. “With the U.S. dollar being strong, I expected a drop in foreign buyers.”
However, as of the end of March, foreign buyer home sales stood at $153 billion, which represents 5% of residential transactions and 10% of dollar volume nationwide. That surpasses the highest foreign buyer purchase volume of $103.9 billion recorded in NAR’s annual survey in 2015. The survey has been published since 2009.
Most of the increased activity from foreign buyers occurred in the second half of 2016.
According to NAR’s 2017 Profile of International Activity in U.S. Residential Real Estate, the U.S. dollar may have strengthened against other currencies like the British pound and Chinese yuan, but residential real estate values, while climbing in the U.S., have not been doing so as quickly as other places, making American soil a better investment in many cases than Canada, for example.
All in all, foreign purchasers grabbed up 284,445 residential properties between April 1, 2016, and March 31, 2017. The largest overseas buyers were, unsurprisingly, the Chinese, who account for $37.1 billion of those dollars. They’ve been the top foreign investor in U.S. residential real estate for three consecutive years.
The next strongest foreign buying group was Canadians at $19 billion since the same time last year, more than doubling Canadian purchases the previous year.
While some economists were predicting foreign sales would slump, at least a little, with the strengthening of the American dollar, that hasn’t been the case.
“The commonality,” said Yun, “is that China and Canada have experienced a strong price run-up in their countries.” As a result, they’ve garnered substantial wealth and feel confident about investing outside their home countries, where real estate prices, while growing, are not escalating as quickly or to the same degree as in places like Toronto and Vancouver, where prices have escalated by 21% and 17%, respectively, year-over-year compared to an overall 5% increase in residential property values in the U.S.
Yun said China and Canada, in particular, “are cranking out millionaires, who are looking for a place to park their money.” And the respect for private property rights in the U.S. is particularly appealing to the Chinese.
“The U.S. has always provided a safe haven,” he added. “The foreign presence is not something to ignore.”
WHAT ARE THEY BUYING, AND WHERE?
According to NAR’s foreign buyer survey, nearly half of all purchases by foreign buyers are occurring in three states — Florida, California and Texas. The bulk of foreign buyers in Florida are Canadians, while Chinese investment is highest in California and Mexican investment is highest in Texas. New Jersey and Arizona also have a significant number of foreign purchasers of residential real estate.
While Canadian and British buyers tend to be non-resident purchasers, those from the other top three countries for foreign investment in U.S. real estate — China, Mexico, and India — tend to be resident buyers.
Aaron Terrazas, senior economist at Zillow, says foreign buyers represent three main groups: traditional real estate investors, vacation homebuyers, and those coming to the U.S. to work or study.
While Canadians, like their North American cousins in the Upper Midwest and New England, are principally buying vacation properties in warm weather climates like Florida and Arizona, Chinese investment is a mixed bag, representing not only vacation homeowners but also real estate investors, foreign workers and students.
Yun said a lot of Chinese home purchases in California are either work or education related. Most are looking to purchase new construction, single-family homes, as compared to Canadians, who, Terrazas said, gravitate toward condo living. About a third of Chinese buyers purchase real estate in California.
Matthew Felt, vice president and project director with Polaris, said about 10% of buyers of their properties in the San Francisco Bay Area are Chinese.
He added that most Chinese buyers tend to have some kind of connection with the location in which they’re purchasing — they may be doing business there or have a child attending a California university.
“They’re buying a home to live in when they’re here for business,” he explained, “or for kids who will be attending school. Those are the two main demographics. Investors are actually pretty low.” And that’s no small surprise given that Polaris’ price point is generally over $1 million, a cost at which it’s harder to obtain a substantial return on investment.
Foreigners buying homes to occupy while they work or study abroad are also purchasing in places like New York City and Boston, according to Terrazas. Meanwhile those purchasing real estate as a long-term investment do not always gravitate toward pricier markets, but, as Terrazas said, “those with good growth — parts of Florida or Seattle, for example.” While he noted that investors may purchase for lease as well as resale, “the biggest returns are in resale.”
Felt said he’s seen the biggest uptick in foreign purchases in Arizona. “It’s tied to the value of the Canadian dollar,” he explained. “In 2016, we saw a dip in the Phoenix and Scottsdale markets, but in 2017, that market has come back with buyers looking for vacation and retirement homes.”
While Great Britain ($9.5 billion) was once the top foreign country purchasing U.S. residential real estate, due both to the language affinity and easy availability of flights across the Atlantic to sunnier destinations like Orlando, their ranking has fallen to third.
Meanwhile Mexico ($9.3 billion), which is the fourth largest foreign buyer of U.S. real estate, has routinely been among the top five but with most of those purchases focused on border states like Arizona and Texas. Mexicans’ investment aspirations also have mainly to do with employment, and they steer toward more affordable housing; whereas, Chinese, Canadians, and Europeans put their dollars mainly at the upper end of the U.S. housing market.
WHY HERE? WHY NOW?
Yun credits a lot of the uptick in foreign buyer investment in the U.S. over the last year, particularly among Chinese, to foreign buyer taxes in other locales, most significantly British Columbia, which recently instituted a 15% foreign buyer tax with hopes of slowing down foreign investments in hotspots like the Vancouver area. “That’s $150,000 more for a $1 million residence,” Yun noted. “That’s quite substantial. [I think] the Chinese are seriously redoing the math on Vancouver and going to the U.S.”
Terrazas is less convinced: “Vancouver’s prices dropped earlier this year, but now they’ve ticked up again strongly, so we don’t think it’s had an impact on foreign buyers really.” He doesn’t believe the 15% tax is deterring investment and says foreign buyer taxes are not uncommon. “New South Wales has a 4% buyer tax,” he added, “and it’s had no impact on the market.” Paris is another city that has implemented a foreign buyer tax to little effect.
He said if Vancouver’s city government hoped to stem the tide of foreign buyers entering the local residential real estate market with the tax, they likely will be disappointed. “However, if Vancouver wants to raise revenue, it’s an efficient way to do so because there’s very little demand response.”
Felt is on par with Yun, however, and believes the Vancouver tax has had an impact, pushing more Chinese buyers into Seattle where prices are lower. He said Polaris has seen an upswing in Chinese demand for single-family homes and upscale condos in the city.
Terrazas thinks what’s driving foreign investment in U.S. residential real estate, however, is much bigger. “If you look around the world at low global interest rates,” he said, “the U.S. along with Canadian real estate offer some of the safest, highest returns out there.” Thus, he’s really not surprised by the uptick in foreign purchasers, regardless of foreign buyer taxes.
Yun said the noticeable presence of foreign buyers in the U.S. residential market is never going to go away, though he thinks the coming year will see a retreat in foreign purchasers. He also feels increasing strictures on overseas investment by foreign governments, along with uncertainty about future U.S. policy on immigration and trade, could put a damper on things.
Terrazas agreed: “I don’t think any of the fundamental drivers of this are going to disappear over the next year, though there are more headwinds than a year ago.” He pointed to the strengthening of the U.S. and Canadian dollars as well as the euro and the yuan. “That makes it more expensive to buy in the U.S.,” he added, as do the recent restrictions on capital outflows of more than $50,000 imposed by the Chinese State Authority on Foreign Exchange.
As the Asian nation’s economy continues to grow slowly, the government has looked to reduce the flight of Chinese investors to foreign properties while also endeavoring to lure foreign investment at home.
According to the NAR survey, foreigners spent an average of $536,852 per property between April 1, 2016, and March 31, 2017. That is substantially higher than the average purchase price for U.S. residential properties overall, which stood at $277,733. Seventy-two percent of foreign buyers purchasing U.S. residential real estate did so in cash.
Terrazas said that foreign buyers don’t have a significant impact on the average American homebuyer though. “Most foreign buyers are competing in a different price bracket,” he explained. “They’re looking at homes in the 76th percentile and above, where the average American buyer is looking in the 56th.”
Foreigners, if they’re having any impact on price appreciation, are only doing so at the highest level, where they compete with affluent American buyers. “They’re having negligible impacts on the overall market,” he added.
According to the 2017 Q2 Zillow Home Price Expectations Survey, housing experts and economists claim foreign buyers can have a significant impact on values in the luxury home market. A year ago, surveyed panelists indicated they expected home price growth of 3.4% in 2017. As of this latest report, however, they’ve upgraded that forecast to 4.8%. That forecast change has much to do with an anticipated downgrade in foreign buyer interest that hasn’t panned out so far.
But housing experts see foreign influence sagging a bit in the coming year with Millennials reaching homebuying age having a greater effect on values than foreigners.
The reality remains, however, that home starts are still not up to historical norms, even with foreign buyer influence. Nevertheless, the Zillow report indicates home equity growth in the U.S. will hit $1 trillion for the sixth year in a row this year.
Yun’s concern is less that foreign buyers are pricing out domestic buyers (though it happens in some markets like L.A. and Miami) than he is concerned that a downturn in international buyers could slow the housing economy in some areas of the country. “Much of the new construction in Miami wouldn’t happen in the absence of foreign buyers, or you’d see price depreciation,” he said.
Yun does not, however, expect any coming retreat among foreign purchasers to have anything to do with Trump administration policies or proposed policies. “There’s been a lot of rhetoric,” he remarked, “but I doubt there will be any meaningful policy from the administration. Americans always respect the rights of private property ownership.”