FIRPTA Tax Blog
By: Michael W. Brooks, Esq.
Purchases of US real estate by non-US (foreign) persons slowed considerably during the period of April 2018 to March 2019, per a recent report issued by the National Association of Realtors entitled “Profile of International Transactions in U.S. Residential Real Estate 2019”. This report generally reviewed residential real estate purchases only (not commercial purchases). Much of this international investment drop off was felt in California, which is currently the #2 state in the US in terms of international ownership of US real estate (only Florida annually has more international transactions per year). Foreign persons consist of both non-US citizens who live in the US full-time (such as of foreign workers working in the US on an H-1B Visa) and foreign persons who purchase US real estate but do not live in the US full-time (we see many of these purchases/ purchasers in the Palm Springs area, where most Canadian owners of Palm Springs real estate are still full-time residents of Canada, and we also see many of this type of purchaser just outside of Los Angeles, with the thousands of Chinese owners of real estate in the San Gabriel Valley and Irvine (Orange County) area (where a significant percentage (around 40%) of the Chinese owners remain residents of China (i.e., do not move to the US) while owning the US real estate)).
Foreign Purchases in US Real Estate Decline Generally in 2018-2019
The dollar value of the foreign purchases (of US real residential real estate) declined from $121B in April 2017-March 2018, to $77.9B from April 2018 to March 2019 (a 36% decline). The number of international (residential) purchase transactions dropped from 266,000 to 183,100. Why the decline generally? The report cites a variety of factors: from the high US dollar value; to a global decline in growth; to trade wars; to Brexit; to a tightening of regulations by some countries on capital flight. The top five countries of international purchases/ purchasers of US residential real estate, in terms of dollar value, remained the same in 2018-2019: (1) China; (2) Canada; (3) India; (4) United Kingdom; (5) Mexico. One-third of the purchases from the investors from these top five countries occurred in California.
Chinese Purchasers Decline Significantly
For a variety of reasons (trade war, slowing Chinese economy, high US dollar value and the Chinese government’s more persistent efforts to curtail the amount of Chinese money leaving the country), Chinese purchases/purchasers of US real estate dropped significantly in 2018-2019. The headline number is eyepopping- Chinese purchasers purchased $13.4B in US real estate in the 2018-2019 period, less than one-half the $30.4B purchased by the Chinese in the 2017-2018 period (and it was over $31B for the 2016-2017 period). With one-third of all Chinese US real estate purchases occurring in California (plus a high percentage of those California purchases occurring in Southern California), the retreat of the Chinese purchaser must have a detrimental effect on Orange County (many in Irvine, California) real estate transactions, plus transactions in the heavily Chinese San Gabriel Valley (Arcadia, Monrovia, Monterey Park, Diamond Bar, Alhambra, City of Industry) must have felt the decline as well. Remember, many of these Chinese transactions take place in majority-owned Chinese areas (i.e., a lot of Chinese to Chinese transactions), meaning fewer Chinese buyers will lead to fewer Chinese being able to sell. Will it improve anytime soon? Who knows? Chinese sales did not appear to uptick significantly (according to the NAR report- although international seller statistics were not reported on significantly in the report), so a good bet is many Chinese investors in US real estate are simply riding out the slowdown while continuing to hold their US real estate.
Canadian Investment in US Real Estate Also Slides in 2019
For the last few years, investors from Canada have represented the second largest international investor group in US real estate. Many Canadians purchase US vacation/winter homes in Florida, Arizona and of course the Palm Springs, California area, but Canadians too purchased significantly less real estate (in both amount and quantity) in 2018-2019. In 2017-2018, Canadians purchased $10.5B in US real estate (on $27,400 purchases), while in 2018-2019 Canadians purchased $8B in US real estate (on 19,900 purchases). Why the drop off for the Canadians? The strong US dollar and slower Canadian economy may be responsible for the slight downtick. Will the Canadian slowdown continue? As long as the weather continues to stay brutally cold in Canada in the winter, my guess is a prolonged (several-year) slowdown of Canadian purchases is unlikely.
Conclusion
Other countries with large US real estate investor pools also saw slower domestic economic growth in the reviewed period (the U.K. and Mexico, for example), so one general conclusion is that slower growth abroad (e.g., China, Canada, the U.K., Mexico) will simply lead to fewer real estate purchases in the US. And that’s probably an easy enough answer generally to the question of why international purchases slowed for the reviewed period in 2018-2019. But one could also argue problems (or slowdowns) in the key foreign countries might lead to a “flight to safety”, and safe is how the US real estate market has often been viewed by the world. Regardless, this foreign investor slowdown bears watching. Foreign investors typically purchase more higher-end real estate (and the median price of foreign investor purchases is higher than all purchases), and they often pay with all cash. This is a significant buying block at the top (on down) of the US real estate market. If this international investor slowdown continues, the US real estate market may face some headwinds, and maybe for a while.