Korean Hot Money Enters the US Housing Market

by: David Jackson

Excerpt from our One Page Annotated Wall Street Journal Summary (which you can get emailed to you every morning by signing up here):

South Korean Cash Flows Into U.S. Real Estate

  • Summary: Korean direct investment in the US is rising sharply, partly driven by purchases of residential real estate. The Korean won his risen over 20% against the dollar over the last two years, and many Koreans now believe the dollar will rebound against the won due to higher US interest rates, Korean government concern that a high won is reducing Korea's competitiveness, and new Korean regulations that facilitate capital outflows by allowing individuals to invest up to $1 million in foreign real estate. As a result, many Koreans believe that US residential real estate is a good investment, and US real estate agents are reporting record purchases by Koreans. "Although there are no data for residential real estate specifically, Korean direct investment in North America in the first three months of this year was more than $570 million, nearly half the $1.27 billion total for all of last year, according to the Bank of Korea. It includes corporate investment in stocks and bonds, commercial real estate and infrastructure."
  • Comment on related stocks/ETFs: Predicting currency movements is risky, and this could end badly. The downside scenario: the dollar resumes its fall against the Korean won as the Fed finishes tightening and the US economy slows, and the US housing market tips into a sharper decline. Korean owners of US real estate would then lose doubly. This is significant for the US housing market because, while capital inflows from Korea are probably tiny relative tot the broader housing market, at the margin this is "hot money", parked for investment purposes. And we've seen that markets most exposed to hot money -- such as the market for second homes in the US -- decline faster than other, less volatile markets.