Wealthy, very nervous foreigners yanking their money out of their countries while they still can and pouring it into US residential real estate, paying cash, and driving up home prices – that’s the meme. But it’s more than a meme as political and economic risks in key countries surge.
And home prices are being driven up. The median price of all types of homes in July, as the National Association of REALTORS (NAR) sees it, jumped 5.6 percent from a year ago to $234,000, now 1.7 percent above the totally crazy June 2006 peak of the prior bubble that blew up in such splendid manner. But you can’t even buy a toolshed for that in trophy cities like San Francisco, where the median house price has reached $1.3 million.
And the role of foreign buyers?
[N]ever have so many Chinese quietly moved so much money out of the country at such a fast pace. Nowhere is that Sino capital flight more prevalent than into the US residential real estate market, where billions are rapidly pouring into the American Dream. From New York to Los Angeles, China’s nouveau riche are going on a housing shopping spree.
So begins RealtyTrac’s current Housing News Report.
“For economic and political reasons, Chinese investors want to protect their wealth by diversifying their assets by buying US real estate,” William Yu, an economist at UCLA Anderson Forecast, told RealtyTrac. “The best place for China’s smart money to invest is the United States.”
In the 12-month period ending March 2015, buyers from China have for the first time ever surpassed Canadians as the top foreign buyers, plowing $28.6 billion into US homes, at an average price of $831,800, according to the NAR. In dollar terms, Chinese buyers accounted for 27.5 percent of the $104 billion that foreign buyers spent on US homes. It spawned a whole industry of specialized Chinese-American brokers.
Political and economic instability in China along with the anti-corruption drive have been growing concerns for wealthy Chinese, Yu says. “China’s real estate market has peaked already. Their housing bubble has popped.”
So they’re hedging their bets to protect their wealth. And more than their wealth…
“China’s economic elites have one foot out the door, and they are ready to flee en masse if the system really begins to crumble,” explained David Shambaugh Professor at George Washington University in Washington, D.C.
China has capital controls in place to prevent this sort of thing for the average guy. But Yu says there are ways for well-connected Chinese to transfer money to the US, particularly those with business relationships in Hong Kong or Taiwan.
But in the overall and immense US housing market, foreign buying isn’t exactly huge. According to the NAR, foreign buyers acquired 209,000 homes over the 12-month period, or 4 percent of existing home sales. But foreign buyers go for the expensive stuff, and in dollar terms, their purchases amounted to 8 percent of existing home sales.
In most states, offshore money accounts for only 3 percent or less of total homes sales. But in four states it’s significant: Florida (21 percent), California (16 percent), Texas (8 percent), and Arizona (5 percent). And in some trophy cities in these states, the percentages are huge.
Among California cities that are hot with Chinese investors: Alhambra, Arcadia, Irvine, Monterey Park, San Francisco, San Marino, and in recent years Orange County, “a once heavily white middle-class suburb that is now 40 percent Asian and becoming increasingly expensive,” according to RealtyTrac:
Buyers from China, including investors from Hong Kong and Taiwan, are driving up prices and fueling new construction in Southern California areas such as Arcadia, a city of 57,000 people with top-notch schools, a large Chinese immigrant community, and a constellation of Chinese businesses.
For example, at a new Irvine, California development Stonegate, where homes are priced at over $1 million, upwards of 80 percent of the buyers in the new Arcadia development are overseas Chinese, according to Bloomberg…
Similar dynamics are playing out in New York.
“In Manhattan, we estimate that 15 percent of all transactions are to foreign buyers,” Jonathan Miller, president of a New York real estate appraisal firm, told RealtyTrac. “Luxury real estate is the new global currency,” he says. “Foreigners are putting their cash into a hard asset.” And they see US real estate as “global safe haven.”
This article was originally published on WOLF STREET.