Oct302015

Are Chinese real estate investors less active in Irvine, California?

With the bulk of new home sales in Irvine, California, selling to Chinese nationals, declining sales there is an indicator of overall Chinese capital flows.

Chinese_freedom_support_California_real_estate1I don’t believe we will see another real estate crash caused by American lenders. Since they mastered the art of can-kicking to keep supply off the MLS, they managed to reflate the old housing bubble. It’s very likely they would employ this same technique to prevent any future house price collapse caused by loan delinquency. However, despite the huge influence lenders have on the market, they don’t control all the supply.

If there is any issue that has real potential to drive real estate prices down, it’s the possibility of foreign buyers, particularly the Chinese, reversing the flow of money by liquidating their US holdings to cover financial obligations back home.

Cash buyers are typically the most stable homeowners because they can never be compelled to sell at auction because they failed to pay the mortgage. However, that doesn’t mean cash buyers may not need to sell for other reasons, and if the Chinese government demands repatriation of the money that technically left the country illegally (they knew it was going on but ignored it), that one policy change could flatten the Coastal California housing market.

For years, Chinese could export cash by setting up dummy foreign corporations that import goods into China. The dummy corporation sends a bill to the Chinese mainland for goods that are never shipped (or grossly overpriced), and the money is used by this dummy corporation to buy real estate, often in the US, and often in Irvine, California. The money leaves China through an export sham, but it leaves all the same.

China has experienced sub-par growth of late, and the Chinese leadership may identify the outflow of Chinese capital as one of the culprits. If they decide capital outflows are an enemy of the State, they will do everything in their power to stop it. Think about that: the Coastal California housing market could be radically altered by decisions made by Chinese government officials.

chinese_real_estate_elite_corruption

A policy change that cracked down on this flow of capital wouldn’t be a minor headwind, it would be a hurricane force blast that would flatten house prices here — and don’t think for a moment that the Chinese government would be patient with sellers who want to get top dollar. If they say “bring the money home (or else)”, those houses would flood the market, prices would crater, and nobody in our government or the banking cartel could do anything about it.

Did The Chinese Just Pop London’s Real Estate Bubble?

Charen Investment Research, Oct. 27, 2015credit-crunch

Tighter capital control on money leaving the country should have investors worried.Regardless of China ‘hitting’ the higher end (6.9%) of GDP estimates this quarter, the story has not changed. After investors were burned in the stock market this summer many rich Chinese were terrified to leave their money in China. Even before this, China’s rich have been frequent buyers of property all around the world.

In one article from the Guardian titled ‘China’s rich seek shelter from stock market storm in foreign property’, a real estate agent in Sydney expressed his opinion on the matter, “A lot of high-net-worth individuals had already taken money out of the stock market because it was getting just too hot. There’s a huge amount of cash sitting in China and I think you’ll find a lot of that comes to the Australian property market.”

He is right and wrong.

There is a huge amount of cash sitting in China – but we bet it won’t make it to the Australian property market. You see, the desperation became ever more clear this morning after an article in the Wall Street Journal highlighted several underground banks attempting to move money overseas.

(See: In China’s Alleyways, Underground Banks Move Money)

The Chinese are scared and for that reason the government is wary of capital outflow. Government officials have cracked down on the law stating that Chinese are only allowed to move $50,000 out of China annually. The article states that according to the CBRE group, property purchases are on track to exceed $10.5bn (last years purchases by the Chinese).

We believe the story is a little bit different. Prior to the stock market crash and the very active government effort to curb outflows, the Chinese were moving considerable amounts of money with ease. During the crash, it is likely that investors were desperate to get their money out. However, after the crash it is becoming increasingly more difficult to do so.

Is there any evidence to support this thesis here in the Western US? Consider the following two charts:

New home sales have been declining all year.

new homes sold west 2015

And it’s not due to a lack of new home inventory, which has been piling up all year.

new homes for sale west 2015

Consider this astute observation from earlier this week:

hello 26-10-2015, 14:49

“I hear a lot of people talk about seasonal slow down. However, this seems more than just seasonal slow down. Are there any statistics that could prove or disprove this theory? [see above]

In Irvine, I am these new developments sitting on homes because they can’t sell. Ive seen price drops in Orchard Hills, which I was told would NEVER be the case. I see tons and tons of brand new homes from Beacon Park (which just opened a few months ago) hitting the MLS already.”

This observation is consistent with the charts above.facade

Our thesis is that the Chinese – who helped contribute to higher property prices in cities the likes of London, Toronto, and Melbourne – are now the catalyst to a decline. …

So how exactly is Chinese investment a catalyst for decline?

We believe that China’s government crackdown on funds leaving the country will cause many Chinese to have to renege on payments and thus losing the property they put down deposits on. We expect an excess supply of property on the market because of it – and an ultimate decline in prices until the Chinese government eases it’s crackdown.

The people who deny a real estate bubble in China are wrong, and the deflating Chinese property bubble could destabilize the world economy, but of greater interest to owners of Coastal California real estate, the deflating Chinese housing bubble could turn local real estate buyers into desperate sellers.

Both homebuilders and real estate agents delude themselves with notions about the desirability of Coastal California to convince themselves the influx of Chinese money is based on sustainable fundamental factors. In reality, this is hot money escaping a collapsing market, subject to the policy whims of an unpredictable totalitarian government. Chinese capital is an unstable source of investment, and it could reverse course in a moment based on policy changes in China.

Most California real estate market bulls and enthusiasts blithely assume the influx of Chinese money will never stop because everyone in China wants to live here, right? Unfortunately, in the real world, for money to leave China, it generally has to pass through a Chinese bank and get wired to an overseas location. The Chinese government could easily stop the flow of electronic capital by decree, and it appears they plan to exercise this power to shut off the flow of capital leaving China for US real estate.

China-Real-Estate


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