We have frequently talked about the negative future consequences of hot international money chasing “safe” foreign real estate investments. The recent 2016 Profile of International Activity in U.S. Residential Real Estate published by the National Association of Realtors underscores our concerns perfectly. A look specifically at the purchasing activity of Chinese investors indicates that while aggregate purchase volume slowed somewhat in 2016, the average price paid per unit continued its meteoric rise to $937k, representing a 20% CAGR for Chinese buyers since 2011 vs. only 4% for the U.S. market overall, with purchases concentrated in larger markets like California, New York and Texas.
Other international real estate markets are exhibiting similar issues but seemingly to a much worse degree. In several Canadian markets, for example, residential real estate prices are up well over 30% YoY through June 2016. In fact, an average single-family home in Greater Vancouver now costs well over $1.2mm. Australia, another popular haven for Chinese investment, has also witnessed double digit growth in certain residential real estate markets.
When asked recently about rising home prices and whether certain housing markets in Canada were in a bubble, Central Bank Governor Stephen Poloz responded by saying, “Low interest rates is something we all have in common, and that’s going to cause these things to happen. The risks are clearly rising…I just don’t know how big the risks are.”
To the extent we can offer any assistance to Mr. Poloz in calculating the risks associated housing bubbles, we would be happy to do so. It just so happens that we here in the U.S. have a very good, recent case study on what exactly happens when housing bubbles burst.