There is an old adage in the farm world that says you can buy land only when others are willing to sell. The same is true for iconic buildings and even businesses. Recently we have heard chatter of foreign investment in our country and that seems to concern inquiring minds. Apparently some minds are especially concerned when the buyers are from China.

 

Indeed, China is a financial powerhouse, replacing Japan just a few years ago as the second-largest economy in the world. Regardless, our nation’s neighbors represent some of our largest trading partners, with Canada holding the number one position.

 

People often have noted that Canadian investors purchased large amounts of property in both Florida and Arizona during the economic recession. As the Canadian dollar increased in value, U.S. property became less expensive. Between the currency valuation being higher and U.S. home prices dropping, it was the perfect time for Canadian “snowbirds” to invest in American real estate.

 

The key here is to understand that it was Canadian citizens and not the government who were investing. The same is true today when we talk about Chinese investment in U.S. housing. It is their people, not their government, who are doing the buying.

 

We have experienced recent challenges in housing prices across the United States. The starter home market actually is down in value year-over-year, while more expensive home prices are up by 4 percent year-over-year. The Canadians invested about $11.8 billion in U.S. housing last year and that number has grown to over $13.8 billion this year. According to a National Realtors Association survey, the Chinese have gone from $12.8 billion to over $22 billion in one year! That is a large change and clearly articulates a change in investment behavior.

 

China’s economy has slowed and economically we are concerned about their massive government and municipal debt, not to mention their shadow banking issues. By some measurements, China has a worse debt to GDP ratio than the U.S. did during the economic collapse of 2008. We have talked about similar struggles with Japan and their governmental debt issues, not to mention the fears here in the United States where we live under the twin burdens of deficit and debt. One thing rings true for each of these three economic powerhouses—while the countries have financial challenges, some of their citizens are more than flush with cash.

 

Foreign buyers often make up 15 percent of Manhattan’s real estate market, according to one real estate appraisal firm in New York. Today, that number is closer to 30 to 40 percent. And while Canadians are still buying more units, it is the Chinese who are buying more expensive units, with the median price of their condo and townhome purchases above $500,000. To be clear, these are not all homes purchased as residences, but rather places where buyers are “parking” capital to work in what they view as an opportunistic moment. That opportunity may be because U.S. home prices present a value for their currency as their home country faces economic challenges.

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