Spot The Outlier - Seattle Home Prices Go Vertical As Laundered Chinese Money Flows In

Last summer we declared that "China"s favorite offshore money laundering hub is officially no longer accepting its money" after the city of Vancouver slapped a 15% tax on foreign real estate buyers.  The tax was intended to curb a massive real estate bubble which had resulted from an influx of Chinese money over the preceding years.  The move seemingly worked as it resulted in a staggering and immediate 96% drop in foreign buyers (see: Foreign Buying Plummets In Vancouver: Sales To Foreigners Crash 96%). 

According to data released by British Columbia’s Ministry of Finance on Thursday, foreign investors officially disappeared from Vancouver’s property market last month after the local government imposed a 15% surcharge to curb a record-shattering surge in home prices. Overseas buyers accounted for a paltry 0.7% of the C$6.5 billion of residential real estate purchases in August in Metro Vancouver; this represents a 96% plunge from the seven weeks prior, when foreigners were responsible for 16.5% of transactions by value.

According to the latest data overseas buyers snapped up C$2.3 billion of homes in the seven weeks before the tax was imposed, and less than C$50 million in the next four weeks. The government began collecting data on citizenship in home purchases on June 10. The ministry said auditors are checking citizenship or permanent residency declarations made by buyers and also reviewing transactions to determine if any were structured to avoid tax (spoiler alert: most of them were).

So, take a look at the chart below and see if you can figure out where all those Chinese buyers may have gone...

As The Seattle Times points out today, Seattle"s sudden surge in home prices is the market"s most rapid ascent since just before the housing bubble collapsed a decade ago. 

It marks the most rapid housing-price increase here since 2006, when home values were rising at an unsustainably brisk pace — up to nearly 19 percent growth — before dropping during the recession. The previous high-water mark in the current boom came in fall 2013, when home values soared 13.2 percent.

The price hikes also surpass anything Seattle saw during the 1990s or early 2000s (Case-Shiller’s data began in 1990).

The market isn’t just hot by Seattle standards: No region in the country has had prices soar this fast in the past three years. The last metro area to get this heated was San Francisco, where home costs soared more than 20 percent in 2013 and 2014.

Meanwhile, to our complete "shock", the Times goes on to point out that the Seattle market has seen a lot of interest from Chinese buyers of late who like to pay cash (also shocking) for luxury homes that they don"t even bother to visit before buying and rarely ever actually occupy.

For the past few years, a small but growing portion of homebuyers had been coming from overseas, especially from China — targeting mostly upscale homes, and often paying cash, sometimes sight unseen.

Interest soared last year, after British Columbia enacted a tax on foreign buyers in the Vancouver area. At one point after that tax took effect, Seattle was the No. 1 American city for inquiries from Chinese homebuyers, according to Juwai.com, which helps people in China buy homes abroad.

Foreign homebuyers have themselves contributed to rising prices in some ZIP codes here: Real-estate agents say foreign buyers are more likely to pay cash and bid up homes than other buyers. They also tend to eye luxury homes. In some parts of West Bellevue and along the Lake Washington waterfront, Realtors have reported that half or more of their business now comes from foreign homebuyers.

Juwai’s data show 38 percent of Seattle buyers from China purchase the home primarily as an investment. Some of those buyers might also live in their new home or allow family members to live there, but in other cases, they sit empty.

But it"s probably nothing...maybe Americans are just suddenly attracted to Seattle"s thoroughly depressing climate where residents can go months and months without ever actually seeing the sun.

Purchases Of US Real Estate By Foreigners Hit All-Time High In 2016

In a testament to Chinese oligarchs, criminals, money launderers and pretty much anyone who is desperate to park their cash as far away from the mainland as possible, purchases of US real estate by foreign buyers surged to an all-time high in 2016, according to data from the National Association of Realtors via CNBC.

Foreign purchases of US residential real estate surged to the highest level ever in terms of number of homes sold and dollar volume last year, with Chinese buyers leading the pack, followed by buyers from Canada, the United Kingdom, Mexico and India. Meanwhile, Russian buyers made up barely 1 percent of the purchases.

Foreign buyers closed on $153 billion worth of US residential properties between April 2016 and March 2017, a 49 percent jump from the period a year earlier, according to the NAR. That surpasses the previous high, set in 2015. Foreign sales accounted for 10 percent of all existing home sales by dollar volume and 5 percent by number of properties. In total, foreign buyers purchased 284,455 homes, up 32 percent from the previous year.

According to CNBC, the increase in home sales comes as a surprise, given the dollar’s relatively expensive valuation versus both developed and emerging-market currencies. Half of all foreign sales were in just three states: Florida, California and Texas.

Aging Canadians buying property in Florida and other warmer climates were responsible for the largest increase of buying activity from any one country.

“But the biggest overall surge in sales in the last year came from Canadian buyers, who scooped up $19 billion worth of properties, mostly in Florida. They are also spending more, with the average price of a Canadian-bought home nearly doubling to $561,000.

‘There are more [baby] boomers now than ever before. It"s the demographic,’ said Elli Davis, a real estate agent in Toronto who said she is seeing more older buyers downsize their primary home and purchase a second or third home in Florida. ‘The real estate here is worth so much more money. They all have more money. They"re selling the big city houses that are now $2 million-plus, where they went up so much in the last 10 to 15 years, so they"re cashing in.’”

Mexican buyers nearly doubled their purchases by dollar volume from a year earlier, coming in third behind China and Canada. Though Adam DeSanctis, economic issues media manager at the National Association of Realtors, said "you could easily make the point that perhaps their uptick was wanting to buy now before new immigration policy was in place.”

In general, though, Mexicans have been buying less expensive homes.

“The average purchase price of buyers from Mexico came in at about $327,000, compared with the $782,000 average among Chinese buyers and $522,000 for Indian buyers. Mexicans overwhelmingly favored homes in Texas, while Chinese buyers opted more for California and, increasingly, Texas.

‘The environment is much more Asian-friendly than it used to be with churches, grocery stores and schools that cater to their tastes,’ said Laura Barnett, a Dallas-Fort Worth area Re/Max agent. ‘I have been told they target good schools and newer homes. Yards are not a high priority, but rather community parks.’”

In a sign that home valuations in America’s most populous state might be nearing a peak, some Chinese are being priced out of California, forcing them to buy property in...Texas.

“It"s also possible that Chinese buyers are being priced out of California. The average price of a home purchased by a buyer from China fell from about $937,000 to $782,000, even as the number of properties purchased jumped to nearly 41,000 from 29,000. The drop in purchasing power likely stems from tightened regulations in China with regards to capital outflow.”

As we’ve reported, Chinese authorities trying to stem the capital flooding out of their country adopted new currency controls specifically aimed at stopping Chinese nationals from illegally repurposing money to buy real estate. Those took effect early this year. Because of the new restrictions, CNBC says Chinese demand is beginning to wane – which could be catastrophic for home prices. Luxury markets in cities like New York City are already struggling with high vacancy rates. The recovery in home prices since the crisis has been uneven, but expensive coastal markets like New York and San Francisco experienced massive home-price inflation as younger Americans flocked to urban areas. However, if foreign demand weakens, these markets could be poised for a crash as fewer residents can afford to own their homes.

And of course, there’s the Trump factor…

"Stricter foreign government regulations and the current uncertainty on policy surrounding U.S. immigration and international trade policy could very well lead to a slowdown in foreign investment," said Lawrence Yun, chief economist for the NAR.

But if Chinese oligarchs are now out of the US real-estate game, who’s going to pay $150 million for this 14-acre parcel of beachfront property in the Hamptons?

Vancouver Home Sales Crash 40%, As Toronto Home Prices Soar 22%

What a difference a year makes.

In January of 2016 horror stories were beginning to emerge about what would soon be confirmed as the biggest housing bubble in Canadian history, courtesy of a massive flood of Chinese "hot money" flooding into  Vancouver, which quickly became one of world’s hottest housing markets. As Bloomberg writes, buyers turned up throughout the winter for bidding wars and sales reached an all-time high. Fast forward to last week, when the Real Estate Board of Greater Vancouver reported transactions in Metro Vancouver plunged 40% in January over a year earlier, and down 11.1% relative to December, as both buyers and sellers continue to sit on the amid confusion over whether the recent price gains will continue or whether the bubble has - as we reported last summer - finally burst.

That’s the seventh straight month of declines, according to data
compiled by Bloomberg, and January"s sales were 10.3% below the 10-year average for the month. The ratio of sales to listings - used by the
industry as a harbinger of prices - is also at a two-year low, according
to the board.

And while transactions remain in free fall, prices have still to materially correct, with benchmark home prices up 15.6% in January from a year ago.  The average benchmark selling price of a single-family detached home in the Greater Vancouver Area rose 15.8% y/y to C$1,474,800.

The slowdown is hitting the market for single-family detached homes the hardest. Prices last year had been rising in double digits at this time. In the past six months, they’ve fallen 6.6% to C$1.47 million ($1.13 million), and a 0.6% drop compared to December 2016.

As BBG adds, in September, Vancouver topped a list by UBS Group AG of global cities most at-risk of a housing bubble. Since then, predictions of a downturn in Canada’s priciest real-estate market appear to be materializing after a 15% tax on foreign buyers in August and tighter mortgage rules from the federal government in October. Home prices in the Greater Vancouver region are headed for an 8.5 percent drop this year, Royal LePage forecast last month.

“It’s a lukewarm start to the year,” Dan Morrison, the board’s president, said in the statement. “Home buyers and sellers are more reluctant to engage so far in 2017.”

And while the future of the Vancouver housing bubble remains still in limbo, there are no such concerns about Toronto home prices, which rose more than 20% for the fifth straight month as buyers contended with a shrinking supply of properties on the market. The average home price in Canada’s biggest city jumped 22% to C$770,745 ($591,697) in January from a year earlier, according to the city’s real estate board, and sales climbed 12 percent to 5,188 deals Bloomberg reported. The number of active listings was half the year-earlier figure, and the average days on the market fell to 19 from 29.

“As we move through 2017, we expect the demand for ownership housing to remain strong, including demand from first-time buyers,” Larry Cerqua, president of the real estate board, said in a statement. “However, many of these would-be buyers will have problems finding a home that meets their needs in a market with very little inventory.”

What may be most interesting is that at current run-rates, the two housing markets may soon hit an inflection point, where the average Toronto home costs more than its Vancouver peer: the price for an average detached home in downtown Toronto was C$1.34 million and rising at a bubbly 22% pace, which is rapidly approaching the C$1.5 million average price in Vancouver, and falling. Housing in the western city has cooled, with a foreign-investor tax and escalated prices keeping many buyers on the sidelines, which prompted many foreign buyers to shift to Toronto, as we cautioned in September, and as the data now confirms.