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Residential Department: BackSpace: December 2017

 

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Foreign homebuyers are a mixed blessing

Foreign buyers represent about 5 percent of existing-home purchase transactions in the U.S., according to data from the National Association of Realtors (NAR). That volume isn’t enough to affect home prices broadly across the U.S., housing experts contend. This rising tide of buyers, however, has likely contributed to housing-price bumps and affordability issues in some U.S. markets that are particularly attractive to homebuyers from other nations, those same experts say. 

Among the U.S. states that attract a large cadre of foreign homebuyers, according to NAR data, are Florida, Texas, California, New Jersey and Arizona. Metro areas that are particularly frothy with foreign investment in residential properties include communities such as Boston, Seattle, San Francisco, Miami, Houston and Orlando, Florida.

The leading source nations for foreign buyers, NAR reports, are China, Canada, the United Kingdom, Mexico and India. As of the 12 months through this past March, foreign buyers and recent immigrants acquired $153 billion in residential property in the U.S., up 49 percent compared with the year-earlier period, NAR reports. Foreign buyers represent about half of those purchase transactions, with recent immigrants living in the U.S. accounting for the balance.

“Pure international buying is roughly 5 percent of [existing-home sale] transactions, but even 5 percent, that is not an insignificant sum,” says Lawrence Yun, NAR chief economist. “It does have an impact, particularly given foreign homebuying is more concentrated in certain states and cities and, in those areas, it will be even greater than a 5 percent impact.

“I can’t quantify if it’s a 3 percent or 4 percent impact on prices, but anytime there’s an additional buyer, that puts additional pressure on prices to rise higher.”

The onslaught of well-heeled foreign home-buyers has caused the Canadian cities of Vancouver and Toronto to impose a 15 percent tax on residential properties purchased by foreigners. The tax is aimed at stemming the inflow of foreign dollars that is helping to drive up residential property prices in those two cities and, in the process, creating a perceived housing-affordability crisis for local residents. Alain Forget, the U.S.-based director of business development for Canada’s RBC Bank, says the tax appears to have had some success in helping to rebalance supply and demand in those markets.

Where land is scarce, regulations are intense and construction costs are high … the capacity to build is constrained, and the presence of foreign buyers can lead to lasting price increases. – M. Ray Perryman, Economist, The Perryman Group 

Tax policies designed to slow foreign residential purchases, however, should be viewed on a case-by-case basis, Yun says, and may be effective in some communities, like Vancouver or Toronto, and not so much in other areas. A better approach to the issue of affordability, however, particularly in the U.S., is to look at policies and regulations that spur supply, Yun says. The lack of new-home construction is a far bigger factor in affordability, and foreign buyers aren’t having much influence on increasing construction — nor would increasing taxes on foreign buyers, he adds.

“For some cities, the proportion of foreign buyers can grow large enough to push up prices faster than local incomes rise due to supply constraints,” says Texas economist  M. Ray Perryman of The Perryman Group. “In areas where the barriers to new-home construction are low, such as most of Texas, Florida and Arizona, the market response is to build more homes, which limits the amount of price increases over time.

“Where land is scarce, regulations are intense and construction costs are high, as is the case in New Jersey and much of California, the capacity to build is constrained, and the presence of foreign buyers can lead to lasting price increases.”

The Trump administration’s negative rhetoric and policy proposals related to foreigners and immigrants has had some minor effect on demand by foreign homebuyers, as measured by NAR’s survey results, which show foreign homebuying dipped slightly post-election, Yun says. Still, homebuyers ultimately act on economic interest, he stresses.

For Canadian buyers eyeing U.S. residential real estate, that economic interest exists because, Forget says, U.S. real estate is still seen as a relative bargain, given the high prices commanded for housing in Canada.

“From a Canadian perspective, [the US market] is still very affordable,” Forget says. “Yes, it is getting expensive in some places, especially in Seattle or New York or Miami. But in between, in all those middle markets, there’s a lot of buying of real estate. Canadians, they love Florida, they love Arizona, and for them it’s still affordable.”

Also, President Donald Trump’s immigration policies are not likely to affect the foreign nationals and recent immigrants who have the resources to purchase homes as much as other immigrant groups, such as refugees and general laborers — who typically have little in the way of assets. The immigration policies outlined to date have negatively impacted immigrant laborers who work in construction, for example, and that has a significant impact on the supply side in terms of new-housing inventory and ultimately affordability, Perryman said.

“The administration’s primary focus so far has been on slowing down the number of immigrants entering the country illegally, and that cohort isn’t the group most likely to be buying homes, right now anyway,” Rich Sharga, executive vice president of housing-data company Ten-X, adds.

Despite the potential impact on housing affordability that can be caused by an influx of prosperous foreign homebuyers in particular communities, overall, foreign buyers are seen as a plus for the U.S. economy, housing experts say. They produce economic activity that leads to greater commerce, greater income and more wealth-accumulation potential for domestic residents, Yun stresses.

“U.S. real estate — both residential and commercial — tends to be viewed by many foreign investors as a ‘safe harbor,’ especially during volatile economic times, and can provide liquidity [to the U.S. market] during periods when domestic-buying activity is relatively weak,” Sharga says. “But local, state and federal government officials do need to monitor the type and level of foreign-buying activity, to ensure that markets don’t spin out of control or get too far out of balance.” 

 


 

Bill Conroy is editor in chief of Scotsman Guide Media. Reach him at (800) 297-6061 or billc@scotsmanguide.com.

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