Why Foreign Buyers Are a Bulwark For the U.S. Housing Market
Foreign buyers are increasing their purchases of U.S. real estate. That may cause some unease, but it’s a good development. While our housing markets are improving, the boost from elsewhere is vital.
There is an old adage in the farm world that says you can only buy land when others are willing to sell. The same is true for homes, where American owners are eager for buyers. For the 12 months ending in March, foreign residential real estate purchases in the U.S. surged 35 percent, to $92.2 billion.
According to Standard & Poor’s, the U.S.’s real estate rebound still has not put us back to where we were pre-crash: Home prices are still almost 14 percent below their long-term average as a share of income. But their growth is beginning to slow a bit, says the S&P/Case Shiller Home Price Index. The starter home market is actually down in value year-over-year, while more expensive home prices are up by 4 percent year-over-year.
Recently we have heard chatter that this offshore buying is somehow a threat. Especially when it concerns purchasers from China, a rising world power and perhaps a rival of the U.S. You know, the folks who hack our computers and trample on our copyrights?
Indeed, China is a financial powerhouse, replacing Japan just a few years ago as the second-largest economy in the world. But the U.S. land rush from aboard is not simply a Chinese story. Our nation’s neighbors represent some of our largest trading partners, with Canada holding the No. 1 position.
Canadian investors purchased large amounts of property in both Florida and Arizona during the recession. As the Canadian dollar increased in value, U.S. property became less expensive. Between the currency valuation being higher and U.S. home prices dropping, it was the perfect time for Canadian snowbirds to invest in American real estate.
The key here is to understand that it was Canadian citizens and not the government who were investing. The same is true today when we talk about Chinese investment in U.S. housing. It is their people, not their government, who are doing the buying.
The Canadians invested about $11.8 billion in U.S. housing last year and that number has grown to over $13.8 billion this year, says a National Realtors Association survey. The Chinese have gone from $12.8 billion to over $22 billion in one year. That is a large change and clearly articulates a change in investment behavior.
China’s economy has slowed. Their massive government and municipal debt, not to mention their shadow banking issues, are worrisome. That could lead to a tapering off of Chinese property buying here. By some measurements, China has a worse debt to gross domestic product ratio (250 percent) than the U.S. did during the economic collapse of 2008. Of course, the U.S. and Japan face similar struggles: Today, the ratio is 260 percent for the America and 415 percent for Japan.
One thing rings true for each of these three economic powerhouses—while the countries have financial challenges, some of their citizens are more than flush with cash.
Foreign buyers often make up 28 percent of Manhattan’s real estate market, says one real estate appraisal firm in New York – and the Chinese are the biggest buyers. (Russians, once strong in that market, have retreated out of concern about international tensions over the Ukraine crisis.) And while Canadians are still buying more units, it is the Chinese who are buying more expensive units, with the median price of their condo and town home purchases above $500,000.
To be clear, these are not all homes purchased as residences, but rather places where buyers are parking capital as investments they might use later for other opportunities. Those opportunities may result because U.S. home prices present a value for their currency as their home country faces economic challenges.
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Written by Joseph “Big Joe” Clark, CFP, who is the managing partner of the Financial Enhancement Group LLC, an SEC Registered Investment Advisory firm in Indiana. He teaches financial planning at Purdue University and is the host of Consider This with Big Joe Clark, found on WQME and iTunes. He is a Registered Principal offering Securities and Registered Investment Advisory Services through World Equity Group, Inc, member FINRA/SIPC. Big Joe can be reached at firstname.lastname@example.org, or (765) 640-1524. Follow him on Twitter at @Big Joe Clark and on Facebook at http://www.facebook.com/FinancialEnhancementGroup.
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