In the late 1980’s my thesis for my Political Science degree was titled Direct Foreign Investment in Downtown Denver. In the late 1980’s while the Denver regional economy was decimated by the downtown in oil prices and subsequent move by industry players to consolidate in Houston and Calgary what was interesting is the long-term commercial real estate holdings by foreign nationals including Germany, Mexico and Canada. Some owned whole buildings; others owned land-leases and so forth.
Foreign investment in the United States dates back to the Revolutionary War when France lent money to the United States. More recently the foreign investment activity has been active in residential real estate. Of course the blockbuster deals in New York i.e. purchases by Russian oligarchs, South Florida by South Americans and California and Vancouver by Chinese make the headlines. Yet even here in Denver smaller investors from around the world have been purchasing real estate, which I mentioned in an earlier blog.
When our US Dollar is weaker against other currencies coupled with our Rule of Law orientation AND deeds real estate in the United States is attractive. As the US Dollar is the currency of choice around the world as stable and reliable so goes our real estate. Yet recently inflows of foreign capital into our real estate markets are lessening.
During the last two years foreign investment in U.S. homes has plummeted due to as a strong U.S. dollar, threats of trade wars and a global economic slowdown. Also currency controls in China concerning outflows from the country and constraints on Russia nationals. Added to this is are additional constraints concerning tracking of monies used to purchase real estate.
Foreigners purchased $77.9 billion-worth of existing houses in the year from April 2018 through March 2019, a 36% drop from the previous year and half the amount spent in 2017, according to an annual report released Wednesday from the National Association of Realtors.
Since crawling out of The Great Recession in tandem with growth of incomes in China, Chinese buyers have been the biggest spenders from other countries on U.S homes. However deteriorating trade relations i.e. tariff threats and stricter regulations from the Chinese government have successfully stymied the flow of Chinese investment in U.S. real estate. Of note speculative real estate projects in China are also starting to face headwinds.
By NAR’s estimate, total sales to Chinese buyers fell to only $13.4 billion, a six-year low in the year through March. That’s less than half of what they spent from 2017-18.
In addition to deteriorating relations with China, a strong U.S. dollar and shifting economic conditions are largely to blame for the slowdown. A strong dollar makes it harder for foreigners to purchase U.S. homes or even travel to the U.S. In one of the more extreme examples of the past year, a Brazilian buyer would now need to spend 22% more Brazilian Reals to buy the same house in the U.S. than they did a year ago.
“With U.S. median home prices rising by 4% on average during April 2018 through March 2019, U.S. home prices measured in British Pound, Euro, or Chinese Yuan rose by 5% and by more than 10% when using the Indian Rupee or the Brazilian Real currencies” according to the NAR report.
After Chinese buyers, Canadian, Indians, Mexicans and British buyers spend the most each year on existing homes in the U.S., respectively—all of which pulled back from buying homes over the past year.
British buyers spent the most of any nationality per home, with a median sale price of US $510,700. Still, their activity in the U.S. housing market has dropped off by around two-thirds over the past two years, according to the most recent figures. The issues surrounding Brexit and the subsequent weakness of the British Pound may be partially to blame.
Florida was the most popular destination, with one-fifth of all foreign buyers headed to the Sunshine State where British accented English co-mingles with Russian, Spanish and Portuguese. California came in second, attracting around 12% of all foreign sales, followed by Texas and Arizona.
While Colorado does not make the top inflows concerning foreign currency into real estate foreign investment is a component of our real estate markets. As mentioned in Denver we have foreign buyers purchasing rental homes. In the mountain resorts foreign purchasers are quite prevalent.
The decrease in foreign investment is not necessarily a negative as markets including Vancouver and Toronto are readjusting downward and becoming available to local purchasers versus investors and speculators. If I were developing on Billionaire’s Row in Manhattan and along the east coast of South Florida I would be a more than a little bit concerned.