Globalization and the increased interconnectedness of economic markets means it’s vital that real estate pros everywhere understand the motivating factors for foreigners who want to buy residential property in the United States.

Foreign purchases of U.S. residential real estate slid this year after rising the prior two years, according to the National Association of REALTORS®. But experts don’t think the downturn will last.

That’s because U.S. ties with the rest of the world will continue to deepen, says Lawrence Yun, NAR’s chief economist. The dollar volume of foreign investment in U.S. residential real estate slid 1.3 percent in the year ended in March, due to the global economic slowdown and the dollar’s strength, which made U.S. purchases more expensive for foreigners, he says.

“It’s unclear what will happen in the next year, but over the next 10 years, there will be more foreign presence — more international travel and more global supply chain linkage,” Yun says. “All businesses have a need for more foreign presence. There will be more linkage between economies and rising wealth at the top for foreigners.”

In the 12 months through March, China, Canada, India, the U.K., and Mexico were the biggest outside purchasers of U.S. residential real estate, in that order. Looking more closely at these areas, some trends worth considering emerge.

Growing Millionaires

Of the top five countries, China and India are the only ones whose purchases of U.S. residential real estate have increased over the past six years. These two economies are the biggest among emerging markets, registering annualized growth of 6 to 8 percent, well above their western counterparts. Growth in India and China makes for more potential real estate clients globally.

“They are able to crank out millionaires,” Yun says. “As [these millionaires] become wealthy, they want property in the U.S. as a safe destination for wealth and a place to visit or send their kids.” In addition, there are job ties. For example, software companies in Silicon Valley need engineers from India.

Also, Chinese and Indian parents often hope to provide their children with access to top U.S. schools. “The real estate becomes a human capital diversifier,” says Susan Wachter, professor of real estate and finance at University of Pennsylvania.

One interesting factor in China is the stock market’s recent slump. The Shanghai Stock Exchange index has dropped 13.4 percent so far this year. On one hand, that means many Chinese people have less money to invest in foreign real estate, notes Svenja Gudell, chief economist for Zillow. But on the other hand, the stock decline has made those people who still have money more eager to direct it overseas, where it’s seen as more secure.

Going forward, experts anticipate Chinese and Indian investment will stay strong as their economic growth continues to outpace most other countries. Factors external to both the United States and their home countries will continue to drive them here, too. One example is recent tax changes to the north. “The Chinese have been buying heavily in Canada, but now British Columbia has imposed a tax on foreign purchases of residential real estate,” Yun says. “That may shift interest from Canada to the U.S.”

Neighbors and Historical Partners

When it comes to Canada and Mexico, their proximity to the U.S. largely explains the strength of their investment in U.S. residential real estate, experts say.

“Canadians view the U.S. as an extension of their country, given the few restrictions for them to purchase property in the U.S.,” Yun says. In addition, they seek an escape from cold weather, often buying in Nevada, Arizona, and Florida.

Canada’s new, stricter rules for obtaining a domestic mortgage won’t have much impact on Canadian purchases in the U.S., because most Canadians buy in the U.S. with cash, Yun says.

And to the south, the North American Free Trade Agreement has led some Mexican companies to open offices in the United States. That means more demand for U.S. housing from Mexican executives. Much as Canadians hope to counter the impact of local weather on their lives with real estate purchases, Yun says some Mexican investors are buying homes in Aspen and Vail in a quest for snow.

Britain, of course, shares the same language as, and has a close historical relationship with, the United States. The British see warm-weather U.S. cities as appealing compared to their own dreary climate. Though the Brexit is still being negotiated, Yun predicts that Britain’s decision to exit the European Union will likely put a dent into purchases of U.S. real estate because the pound’s plunge makes them more expensive.

How the Mix Might Shift

Each of these top five contributors will likely remain major players in U.S. residential real estate for some time, analysts say. “For all of these countries, our housing is affordable,” Wachter says. “A [housing] lot here can be purchased for the same amount as in their home countries, except for possibly Canada.” Buoyant job growth also makes the United States attractive, she says.

But other nations may soon jockey to displace the major investors in U.S. real estate. “Countries with great wealth and turmoil will see capital flood to safe countries like the U.S.,” says Christopher Palmer, a professor of real estate at the University of California, Berkeley, who cites Brazil as an example.

Brazil may be joined by its Latin American neighbors. “There’s a proximity, and they have a desire to access U.S. markets, jobs, and education,” Wachter says. “The U.S. also represents a safe haven.”

Is Foreign Investment Coming to Your Town?

The U.S. cities that are receiving the most attention from foreigners are still the “gateway” locations: New York; Washington, D.C.; Boston; Miami; San Francisco; Los Angeles; and Seattle. On the state level, Florida, California, Texas, Arizona, and New York saw 51 percent of the action last year.

But analysts expect this to spread to more secondary locations — Yun lists southern cities, such as Atlanta, Nashville, and Charlotte. There’s already a steady increase in the number of foreign residents there, he says, noting that this may be due to decision-making at international corporations: “It’s related to jobs. Those cities are affordable. That makes a major difference to companies.”

He and others also mention Portland, Ore., which Asian buyers may see as a cheaper alternative to California. Cities such as Oakland that are close to very hot markets also should get attention, Wachter says. She and others also believe college towns will see an increase in foreign investors seeking to send their children to school stateside.

Perhaps the best indicator for whether a city is likely to see increases in foreign investment is whether decision-makers already have a base there, analysts say. “Where foreign investors from a specific country invest, others from that country follow,” Wachter says.

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