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Real estate demand has received a nice boost from foreign buyers over the last 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.
There are several factors driving the strong demand. Many international buyers sought New York City’s real estate since it was priced lower than other world cities such as Hong Kong, London, and Monaco and they believe attractive returns are still available.
The weak dollar in relation to their own currency was also a major factor. European and Asian buyers also had stronger economies than the United States, particularly when we were mired in the deep recession. However, these factors have reversed, indicating this source of may not be as strong a source of demand going forward. We must caution that we do not think it will meaningfully slow since the United States continues to offer a stable political and legal environment that foreign buyers will continue to find attractive.
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 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
This will have an impact on our economy. European imports will be more competitively priced. 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 who reside on the continent. Combined with a weaker economic outlook overseas, this should put crimp on demand from overseas buyers.
Asian economies also slow
Economic growth in Asia, particularly China, has weakened. The country’s GDP is now 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.
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 major factor in boosting demand. Many also seek a second residence here, with New York a popular destination. Roughly half of Chinese real estate purchases were spent in New York, California, and Washington.
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.