Although COVID has been bad for many of us in so many ways, the pandemic did one good thing. The pandemic helped protect American homebuyers from a resurgence in foreign real estate investors.
Before the pandemic hit, 2020 was shaping up to be another solid year. There were growing talks that capital restrictions out of China would ease. Foreigners wanted U.S. assets, and they wanted them bad, partially thanks to a tremendous current account surplus.
Currently, mainland Chinese residents can convert up to US$50,000 per year on foreign currencies for travel, overseas study or work, but not for buying overseas property, securities or life insurance policies.
But before 2018, Chinese foreign buyers were buying United States property in droves. It was easier for citizens to pull resources to buy U.S. property. Then, the Chinese government started cracking down.
Once lockdowns and travel restrictions were in place in the United States and many foreign countries, it became very difficult for foreigners to transact. As a result, COVID gave U.S. buyers the opportunity to buy up our own real estate with less competition.
Dollar Volume Of Existing Home Purchases By Foreign Real Estate Investors
Below is an interesting chart from the National Association of Realtors that shows the dollar volume of existing-home purchases by foreign buyers. The dollar volume peaked in 2017 at $153 billion, and will likely bottom in 2021.
2017 so happened to be the year China’s authorities began capping overseas withdrawals using Chinese bank cards at Rmb100,000 per year in a move designed to prevent money laundering and terrorist financing, the foreign exchange regulator said.
China sought to limit foreign exchange purchases by its citizens in an effort to conserve forex reserves. The measure plugged one of the few remaining ways Chinese citizens were getting money out of the country by broadening the Rmb100,000 ($15,400) limit from a single account to a single individual. Previously, the annual limit of Rmb100,000 for overseas withdrawals was set for a single bank card.
But today, things are a little different. There is excess financial liquidity in the Chinese financial system. Further, China’s strict capital controls are overly strengthening the Yuan currency, which hurts its exporters.
Therefore, Chinese authorities may be considering loosening rules on overseas investments to ease pressure on the Yuan and the country’s exporters. If and when this happens, we will see billions of new money hit our shores.
Pent-up Foreign Demand For U.S. Real Estate Is Building
I’m mainly talking about China because I’m on the west coast. Foreign real estate money from Asia generally buys up more west coast real estate. However, in reality, China only accounts for about 6% of the total foreign volume of U.S. real estate purchases.
The top-five foreign buyer of U.S. real estate include Canada, China, Mexico, India, and the United Kingdom. Together, these five countries account for 29% of the $54.4 billion dollar volume of foreign buyer residential purchases from April 2020 to March 2021. And pent-up demand for U.S. real estate from all these countries has been building.
To get a better idea of how stricter capital controls and COVID impacted Chinese buying of U.S. real estate, take a look at the chart below. It shows the total number of residential properties bought by Chinese buyers in the U.S. from 2010 – 2021.
Once all the data is compiled, the 2021 count will likely be just 1/3rd of its 2017-2018 highs. If you look at the data from Canada, India, Mexico, and the UK, the drop-off in buying U.S. properties actually looks even steeper.
A Discussion On The Ground In Beijing
I recently talked to an old friend of mine in Beijing the other day. We had met in 1997 when I was an exchange student at Beijing Normal University. He agrees there is growing pent-up demand for capital to leave China. More people are getting fed up with the restrictions.
When the Chinese government started cracking down on companies like Alibaba, the desire for investors to diversify out of China increased. Further, once the China Evergrande debt debacle news started spooking the markets, the demand to buy foreign assets ticked up further.
The dream of foreigners sending their kids to the United States for a better education and a better life has not abated. Instead, it has only grown given how well the U.S. economy has performed during the pandemic. The S&P 500 is one of the top-performing indices in the world since 2020.
If capital controls are loosened in China, I see no reason why demand for U.S. residential properties by foreigners won’t surpass their 2017 – 2018 highs. We’re talking about pent-up demand for over 70,000 U.S. residential properties by Chinese foreign buyers alone from 2019, 2020, and 2021.
How Much Pent-up Total Foreign Demand Is There For U.S. Housing?
Nobody really knows how much pent-up total foreign demand there is for U.S. real estate. However, we can make an educated guess. If we average the total dollar volume of existing-home purchases by foreigners in 2017 and 2018, we get $132 billion per year. If we then subtract $132 billion by the actual dollar volume for 2019, 2020, and 2021, we get about $205 billion.
Therefore, we can estimate there is about $205 billion in pent-up total foreign demand for existing U.S. homes. But the figure could be much higher since foreigners have also gotten wealthier over the past several years.
Foreign Real Estate Demand Is Even Hungrier Than Domestic
If you are an American who wants to buy an existing home, this $205 billion pent-up foreign demand figure should make you nervous. You think that competition from U.S. institutional real estate investors is currently fierce. At least we can all invest with U.S. institutional real estate investors to also profit.
However, with foreign real estate investors, it’s really us versus them. Foreign real estate demand is so much hungrier than U.S. domestic demand. Not only does foreign money want to make a profit because it clearly sees how much cheaper U.S. real estate is compared to every other developed nation, foreign money is also seeking security.
The more foreigners fear capital confiscation back home, the more foreigners want to diversify their assets outside their respective countries. Despite our country’s problems, America is one of the most fair and justice countries in the world. At the end of the day, we need to feel secure financially to feel rich.
Back in 2016, I distinctly remember trying to compete against foreign buyers for San Francisco real estate. It was not pleasant. One buyer bought a neighborhood home for $2.3 million in cash for his 21-year-old daughter. The daughter was going to the Academy of Arts.
She and her boyfriend drove around in matching Porsche 911 Turbos. They constantly woke up our baby boy from his midday naps in 2017 because they enjoyed gunning their engines. It was so damn annoying. Since 2018, the home has actually sat empty.
Foreign Real Estate Buyers Will Mostly Affect The Coasts
The recovery of foreign demand for U.S. real estate will be a big deal. I expect dollar volume figures to rebound over the coming years. The shelter we’ve received from foreign investors thanks to the pandemic is waning. Cash-rich foreigners will be coming back.
If it ever gets as easy to buy United States real estate as it is to buy Canadian real estate, I expect U.S. home prices to rise by an additional 35%+ for this reason alone.
It is odd the Canadian government has encouraged foreigners to buy up Canadian real estate to extreme levels at the expense of its local citizens. Local jobs clearly can’t afford some of the median home prices in some Canadian cities.
If foreign relations improve and/or if wealthy foreigners can do a better job of affecting foreign buying rules of U.S. real estate in their favor, U.S. real estate has tremendous upside. Therefore, if you are an American, you should probably buy your piece of America before a foreigner does.
And where is international money going to buy U.S. real estate first? The coasts because they are easier places to visit and do due diligence. The Russians and Europeans will buy up U.S. East Coast real estate and the Asians will buy up West Coast Real Estate. Canadians will tend to buy in the north and all over America.
Foreign real estate investors are coming, whether you like it or not. Instead of suffering, position yourself for the impending tsunami of capital.
Readers, how come nobody is talking about foreign real estate investors buying up U.S. real estate again? Do you believe the foreigners are coming for our assets once the world gets back to normal? How are you preparing for more fierce competition for U.S. assets?
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Foreign Real Estate Investors Are Coming To Buy Up American Homes is written by Financial Samurai for www.financialsamurai.com