Published by the CIPS Network of the National Association of REALTORS®
Third Quarter 2009
The Next Middle Class
By Lawrence Yun
Imagine the prospect of 30 to 50 million new people with disposable incomes and spending potential. Imagine further that this huge number was emerging, not as a unique event, but year-in and year-out over the foreseeable future. Such an occurrence, equivalent to adding the total population of New York state and Texas together every single year, is not a figment of imagination but a reality that is happening today right under our noses, not just in the U.S., but globally.
Emerging Economies Worldwide
Consider the newly rising countries of Brazil, Russia, India, and China.These so-called BRIC countries comprise a population that is ten times larger than the U.S. And the economic growth of these countries in recent years, has been, and is forecasted to be, much faster than that of the U.S. or other industrialized countries.A shift of just one percent of the population of BRIC countries into the ranks of the middle class would translate into an equivalent of 30 million new families with money to spend, including buying real estate.
Aside from the populous BRIC countries, many other countries appear ready to emerge just as strongly and embrace global challenges and opportunities stemming from the introduction of the necessary institutional reforms respecting private property rights and the transfer of properties. Poland, Mexico, Turkey, South Africa, and Vietnam are all examples of potentially emerging economies. Chile, Singapore, and the United Arab Emirates can already be considered to have reached high-income country status.
Put together all of the emerging countries and we could be witnessing growth of up to 80 million new middle class families each year, many of whom will not necessarily be in a position to buy real estate right away, locally or on a global scale.The reality is that faster economic growth in emerging countries nearly always produces skewed gains, with some hitting it quite big—not always a desirable social goal, but a fact of life in countries without a widespread social safety net. But, if only a sliver—say one percent—of the new middle class becomes quite wealthy with extended financial means, that number translates to 300,000 to 500,000 new wealthy, influential market players each year. A glimpse of Russians strolling the streets of Miami and Latin Americans at shops in Colorado ski resort towns are testament to the emerging new consumers.
Global Growth to Continue
Like it or not, globalization is here to stay. Alan Greenspan, in his speech at the NAR Midyear Meetings in Washington, D.C. in May, remarked that the vast expansion of prosperity to a greater number of people over the past 50 years, including those in America, is coming from a steady rise in international trade and the globalization of many economies. He also admitted that freer economies will undergo painful recessions at times, as is currently the case, but said the long-term trend is for a much higher income growth for a greater number of people from expanding international trade.
U.S. international trade data certainly bears out the trend of faster growth opportunities in the international arena. In the past 50 years, U.S. exports rose by an average of 6.5 percent each year (only in real terms and not from price changes) and imports by 6.4 percent.That is more than double the domestic growth in the U.S. economy of 3.1 percent average annual growth. Though we enjoy a higher growth rate in normal years, international trade generally sinks deep in times of recession. In the most recently available data,imports were down 18 percent and exports down 11 percent from one year ago, when compared to the first quarter of 2009.Trade has fallen by even a greater amount in the export-oriented countries of Japan and Germany.
Ups and Downs in Foreign Home Purchases
The rise in international trade, once the recession passes by, means a greater number of international border crossings of people as well.Without delving into the heated debate of immigration reform in the U.S.,the people crossing borders in the context of trade means, for example, a less threatening case of a Nissan management team buying homes in Nashville, or U.S. Microsoft employees needing condominiums in Mumbai. NAR estimates, after examining data from the U. S. Internal Revenue Service (IRS) and the U.S.Department of State,that roughly 80,000 to 100,000 Americans own homes abroad for employment reasons.
In addition to employment-related foreign home purchases, there is an increased trend towards owning a second home abroad. In 2005, during the housing boom years, an NAR study found that 15 percent of all home transactions in Florida were made by foreign nationals who have principal residences outside the U.S. Britains, Canadians, Mexicans, and Germans in particular were very active in buying during the boom years. However, with the housing market undergoing a rather painful transition in terms of falling prices and reduced sales, international buyers have also held back in 2007 and 2008. Also, recall that the housing bust was not solely a U.S. phenomenon but was also present in many other countries, including Ireland, the UK, Spain, China, and South Korea. Less housing equity to work with in foreign real estate meant there was less to spend on U.S. real estate. Also, the global stock market collapse has surely limited the number of people with the financial means to buy now compared to the past.
But for some international buyers who have been on the sidelines and lucky enough to have cash cushions despite the worldwide recession, the current knocked-down home prices and low mortgage rates must surely be enticing. Anecdotally, there appears to be a surge in buying activity in Arizona by Canadians in early 2009 as home prices have tumbled, with some neighborhoods experiencing price cuts of more than half from the peak.
Some recovery in the global stock market indices also bodes well for people to extract additional equity for buying properties in the U.S. For a longer-term trend, demography certainly looks positive for foreign second home purchases. Baby boomers are reaching the age where some are buying that second home now with the intent of making it into more permanent or semi-permanent residency after retirement. And this favorable impact of the baby boom phenomenon of nearing retirement is not a special U.S. experience, but a shared experience among many of its partner countries. After all, the Second World War ended at the same time for all countries involved.
A Two-Way Street
International home purchases will not be a one-way street of offshore buyers of U.S. property. Though many are attracted to the U.S. because of the clearly defined property rights with absolutely no chance of government confiscation, many other countries also provide similar legal benefits. Legal rights to property are well established in Western Europe. Now, Brazil has been actively promoting its country as a place to do business, and where legal property rights are respected. The recent reelection of a prime minister in India who understands the importance of a market-based system is also encouraging.
Already there are about five million Americans living abroad at any given time. Even small countries like Ireland and Israel each receive, via postal mail, over 8,000 U.S. social security checks. In Britain, over 33,000 Americans are employed with an average salary of $166,000. NAR estimates more than a half-million Americans living abroad own property in their country of residence, with Mexico as the top destination of choice. Donald Trump, for example, is building condos to sell to Americans in the Baja California region of Mexico. In recent years, Costa Rica has become a particularly popular spot for Americans, though hard data is difficult to obtain at the moment.
Finally,with regard to commercial real estate,foreign direct investment in U.S. real estate had been rising prior to the recession.The most up-to-date data— from 2007—indicates that $41.7 billion in FDI flowed into the U.S., an increase of more than 20 percent from 2006. Investors from Latin America were most active in the U.S., followed by those from Australia, Germany and Japan.The trend is likely to have suffered a setback in 2008 and 2009 due to the global economic slump. Just as international trade has been consistently outpacing domestic economic growth,however,there’s no doubt that cross-border commercial real estate investment will also pick up at a faster percentage rate than that which is based solely within domestic borders.
We are a part of a global economy. For many, anxiety will naturally rise from uncertainties in the mar-ket.But the underlying fact is that the global train has left the station. World economies will rise as a result. Knowing this, as a real estate practitioner, you can position yourself appropriately to make the most of emerging opportunities.
Note: Detailed studies of past NAR studies on international homebuying,
foreign direct investment, and Americans buying abroad can be found at
www.realtors.org/research.
 Lawrence Yun is NAR’s Chief Economist and Senior Vice President, heading the Statistics and Forecasting Groups of its Research Division. He writes regular columns on real estate market trends, creates NAR's forecasts, and participates in many economic forecasting panels, including Blue Chip and Harvard University Industrial Economist Council.
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