A San Francisco perspective: Impact of foreign buyers on housing market

Michael Alexander thinks “This is the story that Vancouver’s deficient press should have run about house buyers.”  From San Francisco’s sfgate:

How and why buyers from China are snatching up Bay Area homes

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Although the Bay Area has always attracted foreign home buyers, anecdotal evidence suggests that their numbers are growing, creating even more competition in areas where demand has far outstripped the supply of new homes. The boom is partly because of globalization, but mostly a result of the tremendous buildup of wealth in developing countries, especially China, which had 2.4 million millionaires in 2013, up 60 percent from the year before, according to the Boston Consulting Group.

Many of these millionaires want to diversify their assets outside of what is still a communist country, send their kids to U.S. schools or have a place to escape if China’s smog gets even worse. Buyers from China are reluctant to talk about their purchases publicly, but real estate agents say they prefer new or nearly new homes or condos in good school districts with great views (don’t we all).

Overseas buyers

“Maybe 20 percent of the deals in San Francisco and the Peninsula are cash overseas buyers,” said Allen Ching, president of the San Francisco/Peninsula chapter of the Asian Real Estate Association of America. “I can only see that increasing.” …

Nobody really knows how many U.S. homes are sold to foreigners. Buyers are not required to disclose their citizenship or residency status on the escrow and title closing documents filed with a county recorder’s office. Some foreign buyers purchase homes in the name of a limited liability corporation. Most have property tax bills sent to a U.S. address of a friend, relative or attorney. …

Trade group survey

One widely quoted estimate of foreign purchase activity ownership comes from an annual National Association of Realtors survey. It asks agents whether their most recent transaction involved an international buyer, then uses their answers to estimate total sales to foreigners.

Based on responses from 3,547 agents, the report said that for the 12 months that ended in March, foreign clients purchased $92.2 billion worth of existing U.S. homes, up 35 percent from the previous 12 months. Foreign purchases represented 7 percent of total dollars spent on existing homes in the latest period. About half of these foreign buyers live outside the United States; the other half are recent immigrants or here on temporary visas.

Canadians purchased the largest number of homes (19 percent), but China accounted for the largest dollar volume of international sales (24 percent). In California, 62 percent of foreign buyers came from Asia, whereas in Texas, 59 percent came from Latin America.

“In very, very specific places, (foreign buyers) are important, but in the overall scheme of things they are not,” said Richard Green, director of the University of Southern California Lusk Center for Real Estate. In Southern California, hot spots include Irvine, the Los Angeles County cities of San Marino and Arcadia, and “the San Gabriel Valley in general,” Green said.

Across the Bay Area, “the percentage of foreign buyers is probably 15 percent, and Chinese is probably half of that,” said Mark McLaughlin, chief executive of Pacific Union. “If you go to Palo Alto, north of 25 percent (of buyers) are Chinese. In San Francisco, it’s 15 to 20 percent Chinese. In Marin, it’s probably 3 percent. In Sonoma, it might be zero.” Berkeley gets some foreign buyers because of the University of California. …

California could also see more buyers as China loosens its currency controls. China limits the amount of foreign currency its citizens can convert to $50,000 per person per year, making it hard to accumulate enough to buy a U.S. home. There are several workarounds.

Chinese business owners who have branches in Hong Kong or Taiwan can easily transfer money from there to the United States. Another way is to give $50,000 each to any number of friends, relatives or employees and have them convert it for you. There are underground banks that move money out of the country for a fee.

Foreign buyers short on dollars might be able to get a mortgage here, although it can be difficult because they don’t have credit scores. HSBC lends money to foreign buyers, relying on international credit sources. But it requires bigger down payments (30 to 50 percent) and lower debt-to-income ratios than it does with domestic buyers.

Capital controls

Perry Wong, a managing director with the Milken Institute, predicts that China will relax its foreign exchange restrictions. “China’s capital controls are weakening by the day,” he said. Just this month, China began a pilot program that — for the first time — lets mainland residents buy stocks on the Hong Kong exchange and allows investors outside the mainland to directly buy stocks listed on the Shanghai exchange.

It’s impossible to quantify the impact foreign buyers are having on home prices, but experts say it’s much less than the tech effect. International buyers “don’t really compete (in) entry-level markets,” Wong said.

In the short term, foreign buying “may raise prices a little bit,” said Ken Rosen, chair of the Fisher Center for Real Estate and Urban Economics at UC Berkeley. But over the longer term, “it also may encourage some supply.”

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Full article here.