Should The U.S. Worry About Too Many Foreign Real Estate Investors?
It’s a real dilemma.
While foreign investment in the United States has generally been viewed as positive, a significant surge in international real estate purchases over the last few years has many people concerned. With international real estate transactions topping $104 billion or approximately 8 percent of total existing home sales dollar volume as of March, 2015, Americans are divided over the issue with each side presenting viable arguments for and against:
On the PLUS side:
- Plays an important role in propelling and strengthening the U.S. economy
- Influences interest rates
- Creates new jobs
- Provides capital for a healthy real estate industry
- Purchases focused on ultra high-end new builds outside the typical domestic price points
- Essential stimulus for new build construction
- Adds to the housing and rental property supply
On the MINUS side:
- Slowing the housing recovery
- Contributing to soaring house prices
- Creating bidding wars
- Pricing local buyers out of the real estate markets
- Aren’t living in the U.S. or contributing to local economies
- Utilizing money laundering schemes through anonymous shell corporation purchases
- Major concern over China’s aggressive buying spree:
- Large-scale conversion of Chinese currency into American dollars may pose a long-term economic threat to the United States
- Becoming a dominant land owner
- Threat of Chinese government vs. private corporations
- Control over large tracts of land through large company purchases
What’s Been Happening?
The National Association of REALTORS® has released its Profile of International Home Buying Activity 2015. Statistics indicate that for the 12 months ending March 2015, international buyers have purchased a total of $104 billion worth of U.S. property. This represents an increase over 2014 and 2013 levels of $92.2 billion and $68.2 billion, respectively.
While many countries throughout the world are well represented as United States’ property owners, there are five key countries that accounted for 51 percent of purchases and stand way above the rest – China, Canada, India, Mexico and the United Kingdom. Until this year, Canadian investors topped the charts for the most in dollar volume purchases. However, 2015 numbers indicate that Chinese buyers have now surpassed Canadians by a massive $28.6 billion to $11.2 billion. While not as impressive, India’s $7.9 billion, Mexico’s $4.9 billion and the UK’s $3.8 billion purchases are still quite significant.
Where Are The Most Sales?
International buyers have scattered throughout much of the country but have selected four most prominently – Florida, California, Texas and Arizona. With these regions accounting for 50 percent of the total investments made, more in-depth studies have been performed to understand the draw. Florida, with a 21 percent share, Arizona, with a 5 percent share, and Texas, with an 8 percent share, are generally favored by European buyers due to the warmer climates. Asian investors are more inclined to look for properties closer to their home country so stick to California (16 percent) and West Coast areas. A high presence of information technology companies in states such as California, New York and North Carolina attract Indian buyers. Other factors such as the presence of family or friends, education and job opportunities, also come into play when choosing the perfect location. Often nationality groups are found in concentrated areas which may indicate that shared experiences or recommendations may also have an influence on the most desirable locations.
Financing Methods Used
It’s interesting to learn that nearly 55 percent of all 2015 international real estate transactions were done with cash. Conversely, only one-third of national purchases were cash. International clients are challenged by U.S. mortgage financing. Without the availability of a U.S.-based credit history, Social Security number, financial profile or underwriting documentation, most foreigners are denied a mortgage. Cash is typically their only option.
According to the NAR report, only about 42 percent of homes purchased by international buyers are used as a primary residence. For those limited to 6-month visas, the purchases are often used as vacation or investment properties. More detailed yet – the majority favor single-family homes over multi-family. In addition, close to 50 percent prefer a suburban community with the balance split between urban or resort areas.
What Are They Spending?
China, once again, is leading the market with an average purchase price of $831,800.
Source: U.S. Census Bureau
What’s Motivating These Purchases?
Economic stability, attractive prices, favorable exchange rates, rising affluence overseas, and an opportunity for an investment in their future are all motivating factors driving foreign buyers to purchase properties in the United States.
The Positive Impact
International investment in U.S. real estate has long been encouraged and welcomed. There are a number of valid reasons that still make good fiscal sense. Both residential and commercial properties have been targeted as profitable ventures for foreign expenditures. Overseas investment in major cities such as New York, Los Angeles, and Las Vegas is propelling the economy and has made many building projects possible. The trickle-down impact found in lower interest rates, new job creation, and increased housing and rental property supply is an essential stimulus to long-term stability.
As demand for commercial properties increases, real estate executives are becoming more confident in the market. The 2015 Akerman U.S. Real Estate Industry Outlook Survey poll found a 60 percent more optimistic outlook about the market from American real estate professionals than a year ago. Their focus identified continuing foreign investment reinforces an improving industry that is better capitalized for future downturns in the economy.
So What’s The Problem?
There is a growing concern that this large influx of foreign investment in American real estate may pose a significant negative impact not realized by the government or average citizens. While the housing industry is in recovery mode, it is at a slower pace than expected. At the same time, there is a high demand for residential properties, resulting in bidding wars. Wealthy international buyers are coming armed with large sums of cash to outbid domestic buyers by tens, or sometimes, hundreds of thousands of dollars. The concern is that this activity will drive prices out of reach of middle-class Americans.
China has become a dominant force in the investment market and are on a buying spree all over the U.S. While individual limits of $50,000 a year (due to increase to $150,000 this year) have been imposed for mainland Chinese transfers out of the country, The Wall Street Journal uncovered questionable practices of wealthy mainland Chinese moving billions of dollars to Hong Kong and then to foreign destinations through shell corporation purchases.
Source: The New York Times
The premise is being made that without immediate proactive measures being taken to curb the influx of Chinese money pouring into the country, the United States may be under a major economic threat in the future. At the very least, acceptance of these suspect funds amounts to little more than a money laundering scheme that should be stopped.
Chinese enterprises are gaining control over immense parcels of U.S. territory through the purchase of large corporations. One such example is the purchase of Smithfield Foods. As the largest pork producer in the world, Smithfield has facilities in 26 states, employs tens of thousands of Americans, directly owns 460 farms and contracts with 2,100 more. Chinese ownership ensures they control the economic stability in dozens of rural communities.
It doesn’t stop there.
Chinese-owned companies are aggressively buying up businesses in economically-depressed areas and encroaching into a wide variety of other sectors such as the auto industry and technology. With plans to build an entire “China City” in Milan, Michigan, and another in New York state, investors anticipate utilizing more than 2,000 acres of land for a “home away from home.”
What Will Happen Now And In The Future?
With similar concerns in Australia and Canada, citizens have taken to petitioning their governments to take action against Chinese real estate purchases. Australia has already implemented stiff application fees and bans on some transactions. Canada is in the early stages of discord, but no mitigation measures are proposed at this time.
International home buying activity profiles completed by the National Association of Realtors projects that if the buying trend continues over the next 10 years, foreigners will own over 35 percent of U.S. real estate. The number is staggering and likely to be a topic of conversation for years to come. Maybe we should worry about too many foreign real estate investors.
“Buying House” Image Courtesy of Vichaya Kiatying-Angsulee at FreeDigitalPhotos.net