July 9, 2009

By Lawrence Yun, Chief Economist

Imagine the prospect of 30 to 50 million new people with disposable income and spending potential. Imagine further that this huge number was occurring 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. It is just that it is occurring not in the U.S., but globally.

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 these countries’ economic growths have been in recent years, and are forecasted to grow, much faster than the U.S. or other current industrialized countries. As a result, 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  four populous countries mentioned above, many other countries appear ready to emerge just as strongly and face up to global challenges and opportunities that stem from laying down the necessary institutional reforms that respects private property rights and the transfer of properties. Poland, Mexico, Turkey, South Africa, and Vietnam are all potential examples of such emerging economies. Chile, Singapore, and the United Arab Emirates can already be considered to have reached high-income country status.

With all of the emerging countries put together, we could be witnessing a growth of up to 80 million new middle class families each year. Many of the new middle-class will not necessarily be in a position to buy real estate right away or on a global scale. However, the reality is that faster economic growth in emerging countries nearly always produced skewed gains with some hitting it quite big. It’s not that this is a desirable social goal, but rather a fact of life in countries without a widespread social safety net. As such, if only a sliver of the new middle class, say one percent of the new middle class, become quite wealthy with extended financial means, then the numbers translates into 300,000 to 500,000 additional wealthy influential market players each year. Russians strolling the streets of Miami and Latin Americans at shops in Colorado ski resort towns are testaments to such a development already.

Like it or not, globalization is here to stay. Alan Greenspan, in his speech at a NAR mid-year meetings in Washington D.C. this past 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 by 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 to the first quarter of 2009. Trade has fallen by even a greater amount in the export-oriented countries of Japan and Germany.

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, the people crossing 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 estimated, based on examining data from IRS and the State Department, that roughly 80,000 to 100,000 Americans own a home abroad for employment reasons.

Aside from employment-related foreign home purchases, there is also an increased trend towards having a second home in foreign countries. During the housing boom years in 2005, a NAR study found that 15 percent all home transactions in Florida were made by foreign nationals who have principal residences outside the country. Brits, 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. If you recall, the housing bust was not solely a U.S. phenomenon but was also present in many other countries, including Ireland, U.K., Spain, China, and South Korea. With less housing equity to work with in foreign real estate, there was less to spend on U.S. real estate. In addition, the global stock market collapse would surely have limited the number of people with the financial means to buy now compared to the past.

However, for some international buyers who have been on the sidelines and lucky enough to have cash cushions despite the world-wide 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 by 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 America’s partner countries. After all, the Second World War ended at the same time for all countries involved.

International home purchases will not be a one-way street of foreigners buying in the U.S. 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 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 election in India that saw the re-election of a prime minister who understands the importance of a market-based system is also encouraging.

Already there are about 5 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 property ownership by Americans living abroad at slightly over half a million, 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, in regards to commercial real estate, foreign direct investment in U.S. real estate had been rising prior to the recession. From the most up-to-date data, which is only to 2007, $41.7 billion flowed into the states, which is an increase of better than 20 percent from 2006. Investors from Latin America were most active in the U.S., followed by Australia, Germany and Japan. The trend is likely to have suffered a setback in 2008 and 2009 due to the global economic slump. However, just as international trade has been consistently outpacing domestic economic growth, there’s no doubt that commercial real estate investment across borders will also pick up at a faster pace (in percentage terms) than those solely based in domestic borders.

We are a part of a global economy. Anxieties for many will naturally rise from uncertainties. But the underlying fact is that the global train has left the station. The world economies will rise for the better as a result. Knowing this, the real estate practitioners can position themselves appropriately to take the most out of these emerging opportunities.

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Detailed past NAR studies on international home buying, foreign direct investment, and Americans buying abroad can be found here >

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