Could Weak Dollar Spur Housing Sales?
Misc.
Gather round, kids. As the value of the dollar drops on the world market, we here in the Florida real estate market are in a prime spot to watch how international finance issues have very local effects. Last week, an AP article speculated that the weakened dollar was spurring a rally in the real estate market nationwide, but particularly in “attractive†markets like Florida and San Francisco.
The theory is that foreign investors, attracted by the higher buying power of their Euro dollars and the lower real estate prices, will replace first time homebuyers in the real estate ladder. The people who sell their properties to overseas investors will be able to trade up on the real estate ladder, sparking a resurgence in the real estate market.
There are very good reasons that investors from overseas buy real property in the States, and those reasons get highlighted when a weakening dollar makes it all the more attractive to own US property. The Association of Foreign Investors in Real Estate (AFIRE) notes that its members – who represent 17 different countries – hold over $450 billion in real estate, and planned to spend more than $45 billion in 2006 – about 47% of it in the United States. According to the chairman of AFIRE, Mark Baillie, transparency, market fundamentals and the sheer size of the market make US real estate a very attractive investment for their members. They have “expressed an extremely high degree of confidence in the US real estate market going forwardâ€.
AFIRE is only a small part of the market. According to a report in the National Real Estate Investor, there was a 37% increase in foreign real estate purchases in the US in the first half of 2007 over the same time frame in 2006 – and that’s just in commercial real estate. The biggest growth markets for overseas buyers are in developing new projects, and purchasing “underperforming†real estate to turn it around.
What’s piqued the interest of those offshore investors? There are a few things:
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The falling dollar is one obvious reason. As the value of the dollar falls in relation to other currencies – the Euro in particular – it costs far less for a foreign investor to enter the US market. And that keeps dropping – in January 2006, an Irish buyer would have needed €42,850 to make a $50,000 down payment on a home. Today, that same $50,000 down payment would set him back only €31,700.
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Surprisingly, it’s not the biggest reason, says AFIRE. In fact, it ranks fairly low on the list of reasons that their members buy in the US, especially since many of the buyers will be leveraging their investments with locally borrowed money. The biggest reason is the historic stability of the US markets both economically and politically.
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More availability is the third big reason for the upsurge in foreign investments in US real estate. A few years ago, it was difficult to find attractive real estate for sale in US markets. The combination of new development, the subprime mortgage crunch and lowering housing prices have put far more property on the market.
Will the increase in foreign investment be good for us? Historically, overseas investors provide a lot of benefits for the areas in which they buy. Those include:
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direct investment of capital from outside the community
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indirectly exerts downward pressure on mortgage rates
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increases jobs in construction and related industries
The last time we saw a big upsurge in foreign real estate investment, we saw property and home prices soar, catching up with similar properties in other parts of the country. The investors attracted by the spiraling home prices during those boom years were looking at quick turnover profits and high return rates. That wave has retreated, and the one coming in to shore now isn’t interested in looking for quick profit. Instead, these investors are focused on long term, stable investments that will continue to offer more modest returns for years to come.
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This blog entry currently has 1 comments posted.
Dawn
As an overseas investor in the US property market I’m happy to admit to taking advantage of the week dollar in order to purchase property. One reason was that I simply couldn’t afford to buy where I live.
I was able to double my pound and also double the size of the property I could afford. House prices in the UK and particularly in London have risen extortionately over the last decade or so, so much so that it is virtually impossible for first time buyers to get their foot on the property ladder.
Only in the last year have house prices started to fall (http://money.uk.msn.com/mortgages/mortgageguide/article.aspx?cp-documentid=9437613)
but buyers still need a deposit of around 20% in order to secure a mortgage. With the average UK house price at £164,654 that’s just under £33,000 or $58,000.
In London it’s a different matter. Prices fell by 5.3 last month but in the area where I live (where I rent a room) the average house price is still £289,635 / $510,836 http://news.bbc.co.uk/1/shared/spl/hi/in_depth/uk_house_prices/html/al.stm
And we’re not talking about a detached 4/3/3 either! This is probably for a 2 (3 if you’re lucky) bedroom, 1 bathroom terraced house with no parking.
Prices will probably continue to drop in the UK but I think I’ll still get betting value for my money in the US.