The National Association of Realtors (NAR) recently released a report summarizing foreign buyer activity from April 2018 – March 2019, titled Profile of International Activity in U.S. Residential Real Estate. The top three countries that foreign buyers came from were China ($13.4 B), Canada ($8.0 B), and India ($6.9 B). This is the lowest level of international sales since 2013.
NAR found there has been a 31 percent drop in the number of foreign buyers and total sales volume fell 36 percent year-over-year. The decline was due to a drop in 1) the number of and 2) average price of purchases.
What is causing this drop in foreign investor demand? Lawrence Yun, NAR’s chief economist suggests “a confluence of many factors — slower economic growth abroad, tighter capital controls in China, a stronger U.S. dollar and a low inventory of homes for sale — contributed to the pullback of foreign buyers”. Also adding “the magnitude of the decline is quite striking, implying less confidence in owning a property in the U.S”. Let’s break down these points.
Slower Economic Growth Abroad
The causes of slower economic growth in other parts of the world are varied and complex. In April of 2019, the culmination of these factors across countries caused the International Monetary Fund (IMF) to cut its outlook for global growth to the lowest level it’s been since the financial crisis due to a decline in global economic activity.
In general, the lower a country’s GDP, the less money consumers will have to spend. And so, Chief Economist Yun suggests that the reduction in GDP across countries has reduced purchases of US households by foreign buyers.
Decline in Chinese Investments
As the top investor in U.S. real estate, changes to the Chinese economy and regulatory environment will inevitably impact the U.S. housing market. Chinese purchases of U.S. real estate fell 56% from April 2018 through March 2019. Capital controls, the US-China trade war, and a weaker Yen have all contributed to this decline.
Capital controls have existed in China for years, however they have recently become more stringent, making it harder for the Chinese to invest in U.S. real estate. Capital controls are regulations that a nation’s government can use to regulate flows from capital markets into and out of the country’s capital account. In this case, the Chinese government prohibits citizens from exporting more than $50,000 us dollars per person, per year from the Country. Newer regulations and crackdowns have made it harder for the Chinese to get around this regulation, and to invest in U.S. real estate.
A Stronger U.S. Dollar
The U.S. dollar has strengthened. A strong dollar means that relative prices have become more expensive than prices in other countries, and a weaker dollar means that relative prices have dropped. Therefore, as the dollar strengthens, U.S. real estate becomes more expensive for foreigners.
The U.S. dollar has strengthened relative to the Chinese Yen due to U.S. trade disputes, making it even more difficult for the tightly regulated Chinese buyer to invest in America. The decline in Chinese buyers may be felt in our local market – around 34% of all Chinese buyers have purchased in California.
Low Inventory of Homes for Sale
This is not new – across the state, California has consistently not constructed enough housing to keep up with population growth and demand. In fact, there is an entire Wikipedia page dedicated to this topic. One of the outcomes of this shortage is that housing prices in California have risen quicker than the rest of the nation:
These higher than average prices, in conjunction with a strong dollar with make it harder for foreign buyers to purchase California real estate.
What This Means for The California Market
California sales deeds do not require a buyer or seller to disclose citizenship or residency status and so analysts rely on rough proxies for foreign ownership. With that said, certain indicators can help analysts estimate foreign buyer purchases. The California Association of Realtors predicts that from 2015 – 2017, foreign investors made up 3 – 6% of all home sales. The National Association of realtors estimates that 34% of Chinese buyers purchase in California. Therefore, we will likely see a slight decline in demand in our local market.
This would be good news for buyers who would face less competition and would be less likely to compete with all-cash offers – a norm amongst foreign investors. However, the news may not be positive for sellers. A decline in demand of foreign buyers may result in a softening in home prices locally.
Whether you are looking to buy or sell Santa Cruz real estate, You can analyze local home prices in and around Santa Cruz County here. Curious what’s on the market? Take a look at this new site. If you have any questions about finding the right home, and/or your own property’s current market-value, please contact us at (831) 600-6550.