Foreign Buyer Residential Purchases Rose to $153B in April 2016–March 2017

Foreign buyers purchased $153 billion of U.S. residential property in April 2016–March 2017[1], an increase from the $102.6 billion of property purchased in the previous 12-month period, according to NAR’s recently released 2017 Profile of International Activity in U.S. Residential Real Estate. Non-resident foreign buyers purchased $78.1 billion of property, while resident foreign buyers purchased $74.9 billion of property. In terms of units sold, foreign buyers purchased 284,455 residential properties, an increase from 214,885 during the previous 12-month period. Foreign buyer purchases accounted for five percent of existing home sales, and the dollar volume of sales accounted for 10 percent of the dollar volume of existing home sales.

 What explains the increase in foreign buyer purchases, even as the dollar strengthened against most currencies?[2]

One reason is that that U.S. house prices are still generally more affordable compared to countries that may also be of interest to foreign buyers, particularly Canada. In 2016, Canada’s housing prices rose by 15 percent, with house prices rising more steeply in the Greater Vancouver area (17 percent in 2016) and Greater Toronto area (21 percent).[3] Meanwhile, U.S. house price rose at a slower pace of four percent.[4]

The table below shows that U.S. home prices in some metro areas are more affordable compared to home prices in Canada’s metro areas near these U.S. metro areas. For example, the average price of houses in the Seattle-Tacoma-Bellevue area is lower than the average price of houses in Greater Vancouver. With the implementation of the additional 15 percent property transfer tax in August 2016, there are reports of increased buying in Seattle after the 15 percent additional property transfer tax was enacted in Greater Vancouver.[5]

Another reason for stronger demand from foreign buyers is that U.S. economic growth continues to outperform the economic growth in the United Kingdom, Canada, and the euro area. Stronger economic growth means strong economic demand, which suggests more favorable investment returns, including for real estate assets. A strong U.S. economy also provides support to housing demand from foreign buyers who recently immigrated to the United States or who are residing in the United States under work visas.

Another reason may be the related to global developments that enhances the security and stability of investing in residential property in the United States compared to elsewhere (or the perception that the U.S. is a more secure and stable place to invest). Britain’s decision to exit the European Union has created greater uncertainty about the direction of the U.K. economy, although thus far, the U.K. economy has proved resilient after “Brexit”.

Also, even as China’s State Authority of Foreign Exchange tightened capital outflow regulations to stem the outflow of foreign exchange[6],[7], Chinese currency and deposit assets held outside of China remain sizable, valued at $381.6 billion by the end of 2016 (although below the peak of $445.3 billion as of end 2014). This means that there is still a lot of purchasing power potential from Chinese buyers.

The tighter capital controls may yet bear an impact in the coming months. The new regulations impose stricter reporting of capital outflows by financial institutions and require foreign exchange applicants to provide additional documentation to support the financial transaction. The government also promised stricter scrutiny and punishment for those violating regulations, such as the foreign exchange quota of $50,000 per year per individual. New regulations that took effect January 2017 require individuals to fill out a form identifying the use of foreign exchange, and the form prohibits investment uses such as buying overseas property, securities, life insurance, or other insurance-like products. However, non-investment uses, such as expenses for schooling, medical expenses, and tourism, are allowed.

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