Foreign investors pose threat to residential real estate
06/18/2015 05:13PM ● Published by Nancy Babin
The negative impact of foreign investments in American residential real estate might have been badly overlooked by some U.S. government officials — and the potential harm it might cause is largely unknown to the average American.
Reports from a variety of sources suggest that a housing recovery is taking place, though not at the pace expected. As of last month, it was still some 16% below its peak in 2008. Yet at the same time, some U.S. cities are experiencing an unusually high demand for residential real estate, with buyers outbidding each other, often by tens, and sometimes hundreds of thousands of dollars. The same kind of outbidding was going on just prior to the 2007 real-estate crash where wealthy buyers, mostly foreign, were buying homes by paying for them in cash.
Average American home owners, of whom one in three is on the verge of financial ruin, aren’t fueling such buying frenzies. Skyrocketing real-estate prices in America’s selected urban centers are likely the result of a foreign influx of cash, more particularly mainland Chinese money, which is now flooding major American cities in the billions of dollars.
Last year, Bloomberg revealed a secret path that allows wealthy Chinese to transfer billions overseas. Before that, The Wall Street Journal outlined the questionable mechanics of moving cash out of China, where wealthy mainland Chinese bring their funds to Hong Kong and from there to other parts of the world. Most of it ends up invested in favorite foreign destinations — namely the U.S., Australia, and Canada.
Despite some Chinese banks across the border from Hong Kong allowing for a trial program (introduced in 2011) for overseas property purchases and emigration, the Bloomberg report noted that, “China’s foreign-exchange rules cap the maximum amount of yuan that individuals are allowed to convert at $50,000 each year and ban them from transferring the currency abroad directly.” So it’s illegal for mainland Chinese to take more than $50,000 out of the country — but wealthy Chinese are smuggling out billions.
Data from a Global Financial Integrity December 2012 study show that China topped the list of developing countries sending illicit money abroad, exceeding $2.7 trillion for the decade through 2010. In 2010 alone, it totaled $420 billion.
You can bet your last dollar that a good chunk of that Chinese money (of dubious origin) was earmarked for residential real-estate purchases, that is, the roofs over American heads.
The Chinese government turning a blind eye on their fleeing currency is best summarized by Jim Antos, a Hong Kong-based analyst at Mizuho Securities Ltd., cited in the Bloomberg article above. He said that the Chinese government has been trying to internationalize their currency for a lot longer than we thought — with the goal of allowing their Yuan to become freely convertible with other currencies. One can get a more thorough look at the workings of Chinese economy by reading “Trillions of Dollars Missing from the Chinese Economy,” written by Michael Pettis, a senior associate at the Carnegie Asia Programme and professor of finance with Peking University’s Guanghua School of Management.
The National Association of Realtors profiled international home buying activity for 2014. Purchases of U.S. real estate by international clients made during the 12 months ending March 2014 show the total sales volume estimated at $92.2 billion — a 35% increase from the previous period’s level of $68.2 billion. Nearly half, $45.5 billion, of it was attributable to nonresident foreigners which accounted for some 3.5% of the total U.S. existing home sales market of $1.2 trillion. If this trend continues, foreigners will own over 35% of residential real estate in the U.S. over the next 10 years.
General wisdom suggests that a foreign input of moneys flooding commercial U.S. markets might be a good sign for American corporations — but when large sums of those funds are used for snatching up residential real estate, it will, in due time, drive the prices of homes out of reach of middle-class Americans, rendering them unable to afford homes in their own country. Overpriced hubs such as San Francisco, New York, Dallas, Denver, Seattle and others are already becoming out of reach to most Americans.
I strongly believe that the U.S. government should take immediate proactive measures to curb the influx of foreign moneys earmarked for American residential real estate (especially from China). The acceptance of foreign moneys of dubious origin is basically speaking to a money laundering scheme. Furthermore, the conversion of Chinese currency into American dollars on a large scale, may pose an economic threat to the U.S. in the not-so-distant future, aside from making U.S. homes outright unaffordable to American citizens.
It may get even worse. By allowing more moneys from wealthy Chinese and other foreigners to purchase American residential real estate, the average middle class American may eventually end up financially subservient to Chinese investors once they move into the country either as investors or immigrants. In the end, I believe that the American government owes its citizens the right for affordable housing and should do everything in their power to curb the artificial inflationary trends fueled by foreign buyers and local speculators.
Last month, over 25,000 concerned residents in Vancouver, Canada, signed a petitionpleading with their government to curb the foreign buying of Canadian real estate. Responsible Australian leaders have already taken proactive measures to mitigate their own problems in this regard. They pledged stiff application fees and in some cases outright prohibition of any Chinese investors buying into existing Australian residential real estate.
The same, if not more stringent measures should be imposed by the U.S. government. The primary goal of American leaders should be to assure their citizens’ well-being.
“By Dan S. Barnabic, the author of “The Condo Bible, Everything you must know before and after buying a condo”. Mr. Barnabic is a regular contributor to the Wall Street Journal’s MarketWatch, Huffington Post and his articles have appeared in major print media, including The Globe and Mail. You can read his articles at www.danoncondos.com ”