Does A Weaker Dollar Accelerate Foreign Demand?
A: A great discussion and purely my opinion on this topic. As the US dollar continues to fall against other major currencies, people mis-interpret the trend to mean that X number of additional buyers are pouring into Manhattan real estate! In my opinion this is an incorrect assumption! It is not that cut and dry and to dismiss macro economic events, confidence, and near term expectations as part of this currency trade equation is a mistake. There is no anecdotal evidence to support a re-acceleration in foreign demand; its mostly theory and we are left to ask the brokers what they are currently seeing for a clearer picture. In my opinion, confidence trumps the weakening dollar in the mindset of foreigners.
There is no real evidence of a re-acceleration of foreign buyers RIGHT NOW, as the US dollar falls further against international currencies. Forget what happened already and the foreigners that already put their money to work because of currency trends; that is old news. In order to dig deep into this topic, we need to figure out what is happening right now, as the dollar continues to weaken at the same time that a credit crunch is going on. I wonder:
a) does the credit crunch and uncertainty that comes with it affect the mindsets of foreign buyers even as the currency trade for Manhattan real estate gets more attractive?
b) is there a re-acceleration of foreign demand in terms of NEW MONEY coming in right now, as we enter an uncertain wall street bonus season?
UrbanDigs Says - NONE of my buyers are foreign investors! I get a constant stream of buyers asking me to work with them and I can only recall 2-3 requests in the past year or so of foreigners inquiring to use my services. I'm not even seeing any foreign demand for my sales listings. If I had to put an estimate on it, I would say 10-15% of the entire Manhattan buyer pool is comprised of foreign demand. I think new foreign money is being somewhat affected by the credit crunch as caution negates and acceleration that may have taken place with a further weakening dollar in an environment without credit issues. However, foreigners still have a currency trade here and can get significantly more bang for their Euro, Pound, Kroner, Bhat, whatever, right now. Additionally, I think foreign demand is more focused on the higher end product.
Many foreigners already made their purchases here in Manhattan as the weak US dollar is not a new story! Every media outlet, blog on NYC / Manhattan real estate, and TV segments on the topic have been discussing the weak US dollar as one piece of the puzzle in keeping the market here so strong, even as the nationwide housing market floundered. We should be grateful that we had this element on our side, helping to push inventory levels lower as nationwide inventories soared! So, what has really changed?
As the US dollar weakened further in the past 3-4 months, so did the macro environment! Here is what has changed:
*According to Forbes article, "Credit Crunch Hits UK House Market":
The impact of the global crunch is being felt by the British housing market. House prices in the country have fallen at their fastest rate in nearly two and a half years, according to data from the Royal Institute of Chartered Surveyors released Tuesday. "Interest rate rises, the recent credit crunch and subsequent tightening of lending conditions have all had an impact upon demand," said the institute on Tuesday.To say all of this had NO IMPACT on foreign demand / confidence for Manhattan real estate is crazy. To say that foreign demand for Manhattan real estate has accelerated because each Euro now buys $0.05 more US dollars, is crazy! As the US dollar falls against the Euro, it is more THEORY than REALITY that demand will accelerate when so much surrounding the macro environment has changed towards the negative! In short, there is no evidence that for every penny the US dollar loses against the Euro, 'X' number of additional buyers will pour into our marketplace.It added that a shortage of housing supply could help support house prices. "The housing market is seeing the awaited slowdown that many had been expecting, with modest falls reported across most U.K. regions," said RICS spokesman Ian Perry.
I'm not saying there is not an attractive trade here. There is, and there has been for some time. Thanks to foreign demand, many of our new development inventory has gone into contract, in addition to many existing resales; especially the higher end. The element of foreign demand has helped keep Manhattan inventory at such tight levels, which in turn helped keep our marketplace shielded from the nationwide housing slump. But there are other elements at play here helping to support our market:
a) tight inventory**
b) rising rental prices**
c) trend towards living closer to where you work
d) strong economy / strong jobs**
e) years of very strong bonuses**
Notice the asterisks? I put those next to the elements that can easily be effected by the current macro environment; which is why I discuss macro on this site! Do you really think foreigners don't know this? They do, and they have been exposed to the same headline shock that we have been exposed to, resulting in a dip of confidence. That dip in confidence can very easily turn an investor cautious, and in my opinion that is more powerful a force than the currency gains the Euro has enjoyed over US dollars since the credit crunch hit the media back in early August.
Am I alone in this way of thinking? I asked a few brokers their opinion on the topic, some agreed, some didn't:
Douglas Heddings of TrueGotham.com:
This is hard data from my current transactions...the one condo that I have in contract is being purchased by an investor from Spain for his daughter. The other condo I have has been viewed by several foreign buyers with none making offers. The rest of my properties are co-ops so they don't appeal to most foreigners. Yesterday I received a call from another investor from London who is coming into town to purchase a "positive cash flow" investment property for $1.5M to $2.5M (good luck with that right!). Having said all of this, I just don't see the masses of foreign investors pouring into the Manhattan market like I've been reading in the press. One thing that I would add is that the information that I'm getting from new development projects that I visit is that as many as 20-30% of the projects are being purchased by foreigners either as pied a terres or investment properties. Who knows how accurate that info is if you know what I mean?
Peter Comitini of Comitini.com at Corcoran:
I haven't been working with many foreign buyers personally which is not unusual for me. But most agents in my office can cite a recent deal that involved overseas money. On the listing side, of 10 offers I've received on an $8.5M exclusive for sale, 8 have been from overseas buyers. These buyers have tended to be in very strong cash positions as well. I think that this is typical of investment caliber properties right now in the $3M to $10M range. I also think that the foreign investment market is more about smaller buildings than condos, as there is more opportunity to bring value to the real estate by design or repositioning. Condos rarely have positive rental cash flow on NYC investment purchases. On an international scale NYC is still well-priced compared to cities like London or Hong Kong. Anecdotally, the market for pied-a-terres is quite strong and I think foreign money is driving a portion of the luxury new development condo market at the high end.Louise Phillips Forbes of Halstead:I think one must be cautious in drawing too many inferences from the world of Wall Street investing to real estate. A tiny fraction of the NYC residential business is a pure investment play. Finally, I just wouldn't get too spooked about the Wall Street executive who's bonus is off 15% over consecutive record years. He still makes a very healthy bonus. People buy real estate because they need it as much as because it's an amazing investment.
All I can say since November 1st of 2007 I have received signed contracts and/or sent contracts out to seven New York residents who are making an ordinary life change and buying another home in comparison to the 13 foreign nationals that in three weeks have stepped up to the plate to buy in my conversions or other real property. In their minds they are buying a piece of the rock at a huge discount!!!!
Jacky Teplitzky of Douglas Elliman:
I do see a pick up in demand now from foreign buyers. During the crisis of the credit crunch the foreigners were calling me to find out how this situation was affecting the New York market and I kept saying that it was not affecting the market. They were a bit nervous as they are not that familiar with our specific market and they hear the news from overseas and think of the US as one market. Now that the storm has passed they see that I was right and feel more comfortable. I just finished a 3 day intensive work with a foreign buyer and we could not find the right property because of lack of inventory so that proved my point of a stable market here in the big apple.
Comments (18)
when you read this, keep in mind I am giving MY OPINION. I stated that a number of times. There are no research reports providing hard data on this topic that I know of.
That is why I asked some colleagues to tell me on the record what they are seeing, and I thank them for it!
Just because I think this way, doesn't mean I am right or wrong. It's what I see in my everyday experience + what I hear from my contacts who know alot of foreign buyers and what they are thinking. By no means is it representative of the whole market!
Posted by Noah | November 16, 2007 11:31 AM
noah I disagree with you. I think that foreign demand is accelerating as dollars lose ground against euro, pound, etc.
All I am hearing is how many foreigners are buying here in Manhattan
Posted by Greg W | November 16, 2007 1:21 PM
I think this very much depends on the target market.
I am in the market for condos only and my past broker and lawyer are reporting high percentages (and growing) of their business being from foreign buyers.
I would like to point out that your target reader/segment is probably well informed, econ interested American buyers so you probably don't see the foreign demand for yourself.
Its too hard to tell, but personally I see a LOT of people not speaking English at open houses/sales offices. Does that mean anything?
Posted by spaceboy | November 16, 2007 1:23 PM
Not to be cyncial, but the "Foreign Buyers Gone Wild" chatter is just like the "bubble blabber" and "sub-prime speak". It's primarily driven by: (1)reporters who are looking for a headline and know the way to get one is to be dramatic, and (2) agents who want to make everyone think they are busier than the rest and that they are "so, so chic" because all the foreigners are flocking to them.
(3) buyers and sellers who want to support their own best interest.
Here in the Hamptons, there are plenty of foreign buyers, but there always have been! Yes, the euro and pound are strong against the dollar, but even at that discount, there is some trepedation about the US real estate market due to the bad press about California, Florida and Michigan and the wall street credit crisis.
Who's keeping stats on foreign buyers? Let's see some stats! md
Posted by Michael | November 16, 2007 1:51 PM
It also seems to me that there is no way the foreign investors will continue to purchase 30% of the new condo units developed as the number completed continues to rise. I read somewhere (Halstead quote) that about 9,000 or so units had entered the market in 2007 as of October or so. I don't know how many more units will actually be completed, but I've seen some scarily large projections that make 9,000 look like a drop in the bucket.
Posted by Brenda | November 16, 2007 2:05 PM
Michael - I think you hit the nail on the coffin!
Posted by Noah | November 16, 2007 2:08 PM
spaceboy - great point.
"Its too hard to tell, but personally I see a LOT of people not speaking English at open houses/sales offices. Does that mean anything?"
- it means the sales team needs to learn other languages.
Posted by Noah | November 16, 2007 2:10 PM
I thought i would chip in as I am in a unique situation to do so.
British national who works/live in Manhattan, paid in dollars. No debt and a million dollars in cash, half of which is in british pounds (before the dollar got ugly)
So, manhattan condos should appear cheap to me, but they certainly do not as I can see the obvious signs of trouble (housing bubble fueled enconomy, wages/rents not keeping up with RE appreciation, risky loans(1 million dollar loan without income verification for gods sake!)..
Basically, I worked hard for every penny and in doing so became financially savvy to not take excessive risk on what seems a dubious investment. Basically, rich foreginers are not stupid with their money...I would say only those use risky loans overseas are the ones buying + MEGA rich.
I also see the huge disparity with the dollar... if it goes much lower,the next stop is crisis
Posted by ukdude | November 16, 2007 8:06 PM
Jacky Teplitzky of Douglas Elliman: ... During the crisis of the credit crunch the foreigners were calling me to find out how this situation was affecting the New York market and I kept saying that it was not affecting the market.
Right on: no credit crisis, long over, no effect, prices only go up, they make no new land bla bla bla. No wonder some RE guys have credibility issues and foreigners are running as fast as they can.
Posted by WW | November 16, 2007 9:29 PM
ukdude-There is still no evidence of a decline in the Manhattan condo market though. It seems you think a decline is inminent, so "when" do you then think the dive will come? I ask everyone I know as I'm a buyer on the fence.
Posted by lonlad | November 16, 2007 10:01 PM
ukdude - interesting. Thx for sharing the comment.
I wonder, if the credit crunch was NOT happening, would you be considering putting the foreign money (pounds at least) to work in Manhattan real estate?
Has your confidence shifted in past 3 months? You know my thoughts on this, but so many brokers disagree. I wonder if Im biased towards who I am talking to, or if a dip in confidence is really widespread among foreign buyers?
Posted by Noah | November 16, 2007 10:15 PM
lonlad - the fact that the downturn hasn't come yet isn't his point. Its his confidence in the near term prospects of the market that has him cautious. With whats going on, I interpret his comment to mean he doesn't want to take the risk that an attractive currency trade may otherwise offer.
Posted by Noah | November 16, 2007 10:17 PM
I would think foreign demand for NYC real estate would be driven more by something other than FX rates- like jobs.
Finance/IB/HF jobs are, if anything, moving from NYC to London. The US has never been, if not harder, at least more annoying to live in with new post 9/11 immigration/custom practices. Cap it all off with the fact that right now, we are not well loved outside of the US.
Now, those that are coming here anyway are getting great deals due to FX differences- they might get a few extra hundred square feet for the same Euro. That said, a dropping dollar to a foreign investor means NYC's still-but-slower climbing appreciation actually appears negative. You never want to be long a leveraged, depreciating asset.
Posted by drtomaso | November 17, 2007 2:48 AM
Noah,
The credit crunch has simply given me the 'turn signal'.. if it wasn't for the crunch, I might have been tempted because 'Mm its just keeps going on.. I don't see any rational reason why but nothing is going to stop this!'.. but I would have flipped it ASAP pronto at the first chance!
Consider it similar to the HK/Shanghai stock market.. I know of of people in USA that is trading it.. because the currency is pegged you could consider it a 'currency play' as relatively against other currencies its still cheap. All of these are simply 'fools' trying to get a quick buck... the same foreigners buying RE are 'the fools' looking for a quick buck, not a sustainable situation. Any opposite currency moves will have them dumping ASAP.. even at losses due to the high monthlies and neg cash flow.
Once loan standards return to historical standards.. true prices will reveal themselves
Once note. Its entirely possible the FED are trying to induce hyper-inflation in which case I would have to change my mind and buy as a large portion of my cash would be useless..
Posted by ukdude | November 17, 2007 11:28 AM
Also, if you believe in 'top' signals such as
- 1929 crash. 'Shoe shine story'
- taxi driver stock tips
- Time magazine covers
Then you could consider jay-Z,Giselle Bundchen as turn signals for the declining US dollar.
Posted by ukdude | November 17, 2007 12:23 PM
Foreign economic conditions are more important to foreign buyers than US economic conditions.
Recently the top sources of foreign purchases in Manhattan have been Ireland, the UK and Sweden. You have to look at how this situation came about:
• These economies have seen high GDP growth over the past decade.
• They have high employment.
• The price of property in the UK and Ireland and many other parts of Europe has risen at such a rate that it makes Manhattan look like a bargain.
• The average guy making $60,000 a year could get an interest only mortgage with 0% down for $750,000
• A lot of people like plumbers and carpenters who had never invested in anything in their lives and who were in no position to purchase a home got in on this speculative boom driven by hype and cheap debt.
• You had farmers in the British and Irish countryside who inherited 50 acres of land and could hardly make ends meet now calling themselves expert property investors as they sold off parcels of land to developers at 50 times its agricultural value.
• Filled with confidence from the success at home and funded by cheap debt the plumbers and carpenters turned to Spain and ran up the cost of real estate on the Costa del Sol. When that got too expensive they turned to Bulgaria and Bosnia and other eastern bloc countries.
• Then they turned to the US.
Soon enough everyone started to join the bandwagon. You have to understand that the European real estate boom was their dot com bubble. In the US you had car mechanics selling out of the money puts on MSFT and SUNW. In the EU you had the car mechanic buying his second investment property in Hungary.
Now the party is over:
• GDP growth is stalling and will be nothing like the last 10 years – which were remarkable.
• Unemployment is hitting 4 year highs
• Inflation is high enough to allow no room for cutting rates
• Existing foreign investors in US property are seeing a big mark-to-market loss on the dollar – down 15% in the past year alone vs EUR.
• Irish property is already down 15-20%
• UK property is slipping – I don’t know by how much.
• I’m hearing -20% from Irish/British investors in Spain.
Add to that:
• Bad bonuses in London and the end to whole business lines – like SIV’s which were primarily a London thing.
• Tightening credit standards here and abroad.
• The fact that foreign investors are basically excluded from the co-op market.
• The whole sub-prime/credit mess in the US. The state of the US economy. Wall St bonuses and layoffs.
I don’t think any foreigners are going to be propping up the Manhattan market. There will have to be home grown purchasers or inventory will build and prices will fall.
I would say the high end of the market is basically a different market because it’s not something that investors want to deal with. I don’t know where that starts … 2 or 3mm ?
I’d rather have three $1mm investment properties than one $3mm place. I also don't view people like ukdude, who were born abroad but work and live here, as 'foreign buyers'. Especially not if you are goin to live in the place you buy. By that definition I'd always be a foreign buyer too.
Posted by JC | November 18, 2007 10:47 AM
JC - thx for comment. great stuff.
Posted by Noah | November 18, 2007 12:19 PM
Thanks for a great discussion, a reality check for all the foreigner$ that appear in the New York Time$ real e$tate $ection and the Tiplit$ki$ of the world. As the big master Dylan said, "the world is build on $peculation.
Posted by Ronen | November 19, 2007 8:40 AM