The general housing market in the US has yet to fully recover eight years after the Great Recession. Oddly though, values of the most expensive properties in the US have continued to climb at incredible rates following only a small dip in the immediate aftermath of the housing market crash.
Much of the price gains in luxury real estate has been driven by foreign investment. Total real estate sales to foreign buyers hit $104 billion for the year starting in April 2014 and ending in March 2015. That was up 13 percent from the previous year, which hit sales of $92.2 billion. Just to put that figure in perspective, foreign real estate investment in 2009 was a mere $5 billion.
The trend doesn’t show any signs of slowing down, as the Association of Foreign Investors in Real Estate (AFIRE) estimates that 2016 will draw even more foreign real estate investments than in 2015. AFIRE attributes the influx of money to turbulence in the global economy. Between the European refugee crisis, constant risk of EU dissolution, Brazilian recession, and Chinese slowdown, international investors view the US as the safest place to invest their money.
Most of the money seems to be concentrated in a handful of cities already reeling from rapidly rising home prices such as New York City and San Francisco. Los Angeles ranked fourth on the list of US cities drawing the most foreign money.
Aside from the fact that foreign investors view the US real estate market as a safe investment with the best chance of capital appreciation, the accelerating influx of money is also driven by favorable tax laws.
The Foreign Investment In Real Estate Property Tax Act of 2015 (FIRPTA) was signed into law by President Obama in December 2015. The law includes a provision that waives taxes on real estate investment made by foreign pension funds. This makes already appealing US real estate investments even more attractive.
So where is all this money coming from? Surprisingly, half of all foreign real estate investments originated from just five countries. China is buying up the most real estate, investing an estimated $28.6 billion last year. Canadians came in a distant second with $11.2 billion of real estate purchases. Indians purchased $7.9 billion worth of property, while Mexico and UK buyers spent $4.9 billion and $3.8 billion, respectively.
Even amidst the rapid globalization of most markets, real estate by its very nature had resisted such globalization. It seems, however, that those days are at an end. At least in the luxury real estate market, local buyers in major cities will now have to compete with foreign buyers, driving up prices.