Foreign “Smart Money” Frets about Turmoil at Home, Flees, Plows into US Housing Bubble 2, Thinks it’s a “Safe Haven”

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% from a year ago to $234,000, now 1.7% 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% 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 said. “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 said 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 NAR, foreign buyers acquired 209,000 homes over the 12-month period, or 4% of existing home sales. But foreign buyers go for the expensive stuff, and in dollar terms, their purchases amounted to 8% of existing home sales.

In most states, offshore money accounts for only 3% or less of total homes sales. But in four states it’s significant: Florida (21%), California (16%), Texas (8%), and Arizona (5%). And in some trophy cities in these states, the percentages are huge.

“On the residential side, Chinese buyers are looking for very specific things,” Alan Lu, owner of ALTC Realty in Alhambra, California, told RealtyTrac. “They are looking for grand houses with large footprints. And they want lots of upgrades. It’s a must. They also like new homes.”

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% 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% 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% of all transactions are to foreign buyers,” Jonathan Miller, president of New York real estate appraisal firm Miller Samuel Inc., told RealtyTrac. “Luxury real estate is the new global currency,” he said. “Foreigners are putting their cash into a hard asset.” And they see US real estate as “global safe haven.”

And then there’s Florida, where offshore money accounts for 25% of all real estate sales, twice as high as in California, according to a join report by the Florida Realtors and NAR. In 2014, foreigners gobbled up 26,500 properties for $8 billion. Based on data by the Miami Downtown Development Authority, offshore money powered 90% of residential real estate sales in downtown Miami.

In other places it isn’t quite that high….

“About 70% of our buyers are foreign, but recently there’s definitely been a slowdown in the international buyer market,” explained Lisa Miller, owner of Keller Williams Elite Realty in Aventura, Florida. “We still have a large amount of Latin American buyers, but the Russian buyers have dropped off,” she said, pointing at the fiasco in the Ukraine, the plunging ruble, and the sanctions on Russia.

But there’s a little problem:

“We have an enormous amount of condo inventory in South Florida,” Miller said. “We have 357 condo towers either going up or planned in South Florida. We have a ton of condo inventory.”

Brazilians are among the top buyers in South Florida’s luxury condo market. “Brazilians like the water,” explained Giovanni Freitas, a broker associate with The Keyes Company in Miami. “They love to shop. They want high-end properties. They also buy the most expensive properties. And they love brand-name products.”

Capital flight accounts for 80% of his Brazilian business, he said; Brazilians are fretting over the economy at home and the left-leaning policies of President Dilma Rousseff. Miami Beach is a magnet for them. For instance, according to NBC, they own nearly half of the condos at the W South Beach.

Other nationalities, including Canadian snowbirds, play a role as well. Even the Japanese. They’re increasingly worried about their government’s dedication to resolving its insurmountable debt problem by crushing the yen. Miyuki Fujiwara, an agent with the Keyes Company in Miami, told RealtyTrac: “Many of my Japanese customers buy two or three condo units at a time.”

But problems are already piling up. Every spot is unique. In South Florida, it’s 357 condo towers popping up. In San Francisco, it’s the stock market. Read… Housing Affordability in San Francisco & Bay Area Plunges; Stocks, Interest Rates Could Trigger Epic Bust

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  27 comments for “Foreign “Smart Money” Frets about Turmoil at Home, Flees, Plows into US Housing Bubble 2, Thinks it’s a “Safe Haven”

  1. NotSoSure
    Aug 21, 2015 at 1:25 pm

    It’s ultimately good in the end. Once Uncle Sam blows up, people will understand there’s no substitute to making your own country as pleasant as it can be.

    These people haven’t learned the lesson of https://en.wikipedia.org/wiki/Murders_of_Ming_Qu_and_Ying_Wu

  2. AC
    Aug 21, 2015 at 3:44 pm

    I look forward to buying some of these properties for 5 cents on the dollar, or less, in a year or two.

    • Sabbie
      Aug 22, 2015 at 11:30 am

      Why would they sell? Half of them own the property free and clear. Why would they care about a downturn in home values?

      • Posa
        Aug 23, 2015 at 7:25 am

        LOL.. maybeAC expects the Donald to be President and cut off immigration.. but seriously how does buying luxury housing protect wealth? The asset is totally illiquid unless there are successive waves of new buyers. Americans sure don’t have that kind of money these days to purchase realty at frothy prices.

        So the current overseas buyer is stuck with a home where they may or may not reside but can’t be readily converted into cash and even if a sale is possible may not recover the initial purchase price.

        This kind of move only seems to have merit for outright criminal elements who can rapidly flip a property and walk off with laundered cash.

        Providing that Americans are building these units I guess at least it is employing people in an otherwise depressed sector operating well below 2007 output.

  3. Michael Gorback
    Aug 21, 2015 at 3:48 pm

    What was the lesson from the murders of Qu and Wu? Don’t flaunt your wealth by driving a 9 year old BMW?

    • DanR
      Aug 22, 2015 at 6:12 am

      Noticed the same thing with the age of the BMW. However may still signify wealth as you need to pay a lot to maintain it, fix it and keep it looking decent.

  4. Mark
    Aug 21, 2015 at 3:57 pm

    Toronto is already full of young fat Chinese wasting time in Chapters, Starbucks and Shopping Malls around city. Parents cashed houses, cars and business with money they brought here and life is easy. Similar picture is in Vancouver in terms of immigration except numbers are more ridiculous.

  5. Yadubi
    Aug 21, 2015 at 4:06 pm

    If you think the surging US dollar did not discourage Chinese home buyers, just imagine what it does with the plunging Canadian dollar. And it has been going on for so long that a cottage industry grew up around it – the only still standing leg of the Canadian economy. Some ever suspicious souls suspect a great deal of it is money laundering.

    • Mark
      Aug 21, 2015 at 8:50 pm

      Selling country brick by brick.
      Falling Canadian dollar is invitation to all foreigners to acquire more and drive home prices to oblivion, and Canadian families – who cares. Wealth transfer from boomers to millennial will help few and for majority it will become dream to own anything.

  6. michael
    Aug 21, 2015 at 4:09 pm

    I have seen these movie once before only it was the Japanese. It does not end well.

  7. Petunia
    Aug 21, 2015 at 5:26 pm

    The prices in Miami are ridiculous. With 5-6K condos coming online in the next year you can see the writing on the wall. Either every rich person who wants to leave their country moves or invests there or there will be another collapse.

  8. Nick Kelly
    Aug 21, 2015 at 10:49 pm

    Re: the comments about too many Asians-yes it does alter the character of Vancouver, however BC compared to say Europe is almost uninhabited. It has roughly the population of Paris.
    I understand that Asians like to crowd together- why Westerners do is more of a puzzle. It is especially strange to see people on a limited but guaranteed income electing to live in one of the world’s most expensive cities.

    • backwardsevolution
      Aug 24, 2015 at 12:44 am

      Nick Kelly – Vancouver is simply expensive because of the Chinese money flooding into the city. They’re buying three, four, five condos at a time, expensive mansions, anything that isn’t nailed down. This puts tremendous pressure on people who were born here. Prices are being driven up, and for what? So some corrupt Asians can pad realtors/lawyers/bankers/developers’ pockets. Canada is being run by the above vested interests, and the citizens are the losers.

      You tell me what Asian country would ever – EVER – allow foreigners with cash to come into their country, push up prices, and overtake the local population. Not gonna happen. It would not be allowed. If anything, they should have been restricted to condos ONLY, and perhaps in the “uninhabited” parts of B.C. Of course, we all know that they wouldn’t want to go there. They want to go where it’s already been made nice by the hard-working taxpayers.

      If you say anything, you’re called a racist. Meanwhile, what used to be a beautiful little city is sold out for short-term gain and long-term pain. It is an absolute crime.

  9. Mary
    Aug 21, 2015 at 11:20 pm

    Nothing new actually. The US is not the only one with expensive properties at cities. Look at London to Tokyo to Hong Kong, Singapore, Zurich, Vancouver, Sydney.

    Today’s rich are global rich and they want a roof over their head in every corner of the world where their business might take them. But when you embark on QE and perpetually zero or negative interest rate, bubbles are inevitable.

  10. interesting
    Aug 21, 2015 at 11:50 pm

    this is amazing, China is printing with reckless abandon (just like everyone else i might add) and buying up the world with this freshly printed money and nobody cares.

    how does this all end? it’s to the point now where there is no hope for most Americans to ever own a home, i know it’s completely out of reach for me.

    • Mel
      Aug 22, 2015 at 7:37 am

      No, no. Fresh-printed yuan have nothing to do with this. Foreign assets are being bought with U.S. dollars that China earned by manufacturing the all the world’s consumer goods. Ditto for the gold that’s being bought. Not literally shorting the dollar, since these are dollars they already have.

  11. Michael Francos
    Aug 22, 2015 at 5:48 am

    Let as much foreign money as possible be ploughed into your local Real Estate market. The more the better.

    Then, when so much money has been made and the voters are getting angry, tax these foreign investors so heavily they are forced to sell. Or better still, find them guilty of laundering money then confiscate the property, then sell it, with the proceeds going back into State coffers.

    Should be a vote winner, unless your a foreign property investor. But then again, they don’t vote.

  12. B.S.
    Aug 22, 2015 at 2:05 pm

    I would like to see a study on the method of purchase from foreign buyers. Is it by cash? Or is it utilizing a bank mortgage? I suspect it is mostly by cash as opposed to mortgage loan, but it would be a big factor in seeing who stays and who walks if the market crashes.

    • Aug 22, 2015 at 2:29 pm

      The report said that about 70% of the purchases by international buyers are cash. I would assume that almost all of the purchases by China’s wealthy are cash since they’re trying to get their money out and invest it somewhere other than China. Canadian snowbirds buying a second home in Florida may be more likely to get a mortgage.

  13. Andrew
    Aug 22, 2015 at 9:13 pm

    I don’t understand how there can be SO much Chinese money. It’s been swamping Australian, UK, NZ, Canadian, US property for a long time now. When will it ever stop? Surely it cannot continue. And surely that much capital leaving the Chinese economy has sealed its fate amongst the incredible debt levels.

    • Aug 22, 2015 at 10:08 pm

      China has created the largest credit bubble the world has ever seen. “Money creation” – that’s what banks do – is another term. Some of it has been spilling over into other countries.

      But you can’t do this forever. Something is going to break someday. And maybe we’re seeing the first cracks of that in the current financial turmoil in China.

  14. BradK
    Aug 22, 2015 at 10:30 pm

    Just a thought…

    If much of the new, new housing bubble is being driven by foreign nationals purchasing U.S. properties with cash I’m not sure what could possibly deflate this. At least in the short term — unlike the sub-prime (followed by faux-prime) loan implosions which snowballed into the 2008-9 collapase. Worse case they stop maintaining these properties, which I would imagine might have a disparate impact on HOA’s due to missed maintenence fees. But it’s far from a pending forclosure epidemic.

    On a related note does anyone know the U.S. Immigration policy concerning foreign property owners? If they own property on U.S. soil are they allowed to live in or visit it w/o obtaining citizenship or resident alien status? Or do they need to apply for tourist or student visas to (temporarily) occupy their property?

  15. Lee
    Aug 23, 2015 at 2:19 am

    The flood of Chinese money into USA real estate shouldn’t be a surprise to anyone.

    With few restrictions, if any, on the purchase of RE in the USA one would expect foreigners to buy there.

    Even with the restrictions on buying RE by foreigners here in Oz they still somehow manage to purchase billions of dollars of homes.

    Which homes have been bought by Chinese? Easy to see: the huge ones taking up almost the wntire lot. The ones with no gardens or trees and if they do have them, the ones that are not kept up.

    Funny the article didn’t mention Hawaii. A huge magnet for foreign buyers and one where prices have soared as well.

  16. hidflect
    Aug 23, 2015 at 9:13 am

    I just got an email from a banking friend who’s looking to buy an upscale apartment in Tokyo but is being put off by all the Chinese buyers driving up the prices. Tokyo as well..? Are they crazy? Prices have dropped 30% there in the last 10 years. They must be desperate.

    • backwardsevolution
      Aug 24, 2015 at 12:13 am

      hidflect – the Chinese are banking on price appreciation. They typically buy two, three or four condos. Others are sucked into buying there because “now is a good time to buy, prices are low in Tokyo,” and as more pile in, the first buyers get out. It’s all for capital appreciation. Well, it’s also about getting their corrupt money out of China before the whole house of cards falls and the peasants start attacking them for their wealth.

      • Lee
        Aug 24, 2015 at 6:25 am

        Capital appreciation on condo’s in Tokyo?

        Fat chance of that.

        Tax on the capital gain on that type of asset if held for less than than five years is going to be 90%.

        • hidflect
          Aug 24, 2015 at 8:29 am

          Well:

          If held less than 5 years: 30% income tax + 9% municipal tax*¹ + 2.1% Tohoku reconstruction tax*² – See more at: http://japanpropertycentral.com/real-estate-faq/capital-gains-tax/#sthash.wnG6dNCK.dpuf

          But the point is made. The tax is high and the chance of a surge in capital gains is very, very small. If you go out of Tokyo you can find entire villages that have virtually shuttered and closed down. The property now almost free. Even the hardcore of elite enclaves from Ebisu to Daikanyama, etc. have slumped. The Chinese are low information voters here.

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