Slow Foreign Real Estate Demand Could Dampen

Real estate demand has received a nice boost from foreign buyers over several years. We have covered the topic several times over the past year. Those seeking a refresher can Foreigners Capitalize on New York City Real Estate and Structural and Tax Considerations for Foreign Investors.

Several factors are driving the strong demand. Many international buyers sought New York City’s real estate since it was priced lower than other cities such as Hong Kong, London, and Monaco. They believe attractive returns are still available.

The weak dollar as their currency was also a significant factor. European and Asian buyers also had stronger economies than the United States, particularly when mired in a deep recession. However, these factors have reversed, indicating this source may not be as reliable a source of demand going forward. We must caution that we do not think it will be meaningfully slow since the United States offers a stable political and legal environment that foreign buyers will continue to find attractive.

Strong dollar

There are a variety of factors that are influencing the stronger dollar, particularly compared to the Euro. The United States economy is growing faster than our overseas counterparts. This has led to a quantitative easing in the Euro Zone designed to hold down long-term interest rates. In the past six months, the Euro/US Dollar exchange rate has gone from $1.2794 to a recent low of $1.0481 last month.

European imports will be more competitively priced. This will have an impact on our economy. However, this also means it puts a lid on inflation, and the Fed may raise rates at a more measured pace.

Nonetheless, our readership is more concerned with the more immediate impact on real estate. This will make real estate more expensive to those on the continent. Combined with a weaker economic outlook overseas, this should put a crimp on-demand from overseas buyers.

Asian economies are also slow.

Economic growth in Asia, particularly China, has weakened. The country’s GDP is advancing at less than an 8% rate, which is much slower than the over 10% growth from a few years ago.

This has been an important source of demand. According to the National Association of Realtors, Chinese buyers represent the largest or second-largest group of buyers in 46 states.

Half of Chinese real estate purchases were spent in New York, California, and Washington. Heading into the spring selling season, this could temper demand. There will be less wealth. This could cause potential Chinese buyers to hold off on investment properties, a significant factor in boosting demand. Many also seek a second residence here, with New York a popular destination.

Conclusion

We do not think demand from foreigners will evaporate. It may merely be tempered. Moreover, wealthy buyers from China may be relatively immune to slower economic growth or decide that real estate in the United States, and New York City, in particular, may still represent an attractive investment opportunity, particularly in light of their slowing economy.