Are today’s homebuyers counting on continued Chinese home purchases?
The flow of money into the US from China slowed recently. Is this an alarming new trend, or a temporary setback?
Stories about foreign buyers circulate periodically in the mainstream media. The plot is always the same: foreign buyers loaded with cash are buying houses as an investment. The nationality changes from time to time, but the narrative is always the same, and the implied urgency to buy before a foreigner buys your dream home is always present as well.
Foreign homebuying has been part of the landscape in California since the gold rush, comprising a steady 5% to 7% of the housing market. These news stories imply the number of foreign buyers is large and growing, but the reality is that these numbers are little changed over time — the composition changes, but the numbers don’t vary much.
This leads many California homebuyers to be complacent about foreign demand. Over the last several years, Chinese buyers, equity locusts from their domestic real estate and stock market bubbles, poured money into high-end homes across California, particularly in Irvine. In the case of Irvine, the Chinese buyer has become an outsized portion of home sales, anecdotally more than half of new home sales. Any disruption in this flow of money would have major repercussions for sales and price.
What happens if deflating Chinese housing bubble or stock market bubble turns local real estate buyers into desperate sellers? Realistically, Chinese money 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.
Another concern over the influx of Chinese capital has little to do with the government. Similar to the stock market and real estate market collapse in Japan in the late 80s, a simultaneous collapse of both bubbles (And they are bubbles) could severely disrupt or even abruptly halt the flow of money from China into the United States. People can’t export money they don’t have.
by John Burns August 19, 2015
Chinese home buyers comprise roughly 2% of US housing demand—and far more than that in the gateway metro areas with excellent airport access.
- According to the NAR, 16% of international home buyers come from China and spent $29 billion last year, surpassing Canada, which has fallen from 24% of foreign activity to 13%.
- CNBC reported that 39% of foreign buyers in Manhattan are Chinese, up from 12% last year. Passenger travel to the US from Beijing has increased 141% in the last 5 years and has increased 127% from Shanghai.
- Of the 8 currencies we track for foreign buying activity, the Chinese currency is the only one that has held up against the dollar in the last year, and that just began changing last week.
News reports confirm John Burns’s observation. (See: As Stocks Fall, China’s Big Spenders Pull Back) Boom times for luxury in China are largely over, after the recent stock market rout and currency devaluation, compounded by an already slowing economy and a government crackdown on lavish gift-giving.
- The Chinese economy has grown more than 800% in 14 years, clearly creating many millionaires along the way.
These gains are remarkable even considering the small base it grew from. Over the next several years we will know how much of this wealth is real and how much is manufactured by the Chinese Central Bank.
I live and work in Irvine, California, which many consider to be ground zero for Chinese new home investment in the United States. In addition to everything else great about living in America, Irvine has fantastic schools, many new homes (Chinese have a huge preference for new over resale), a very well established Chinese culture, and is within one hour of Los Angeles International Airport. Some of the new home communities we have worked on in Irvine have sold more than half of their homes to Chinese buyers, and I am being conservative here. Prices often exceed $1 million, and frequently there is no mortgage. CNBC recently featured Irvine in their story on Chinese home buyers. …
My last rental in Irvine was owned by a Chinese family that paid cash. I know from first-hand experience that this phenomenon is real. It doesn’t take a demographics study to notice the increasing percentage of people of Chinese descent around Irvine.
Chinese interest in US housing is not confined to California, as our consulting team has noticed Chinese home buying in areas served by all of the major airport hubs. In South Florida, agents have been flying directly to China to compensate for declining demand from South America.While the recent Chinese stock market correction has caused a decline in sales (one of my builder clients has noticed a sharp pullback, another just told me about a home sale cancellation specifically due to the buyer’s stock market losses, and one publicly traded home builder even mentioned the pullback on their earnings call.), our research has convinced us of tremendous Chinese demand to buy US real estate for their families and as investments.
Is the current disruption an aberration? Should we expect a quick rebound and an ever-increasing influx of Chinese money?
Nonetheless, we remain very uncertain about the level of future Chinese home buying:
- Is the number of people who can no longer afford to purchase a home after the stock market correction and currency devaluation greater or less than the number of people who will be encouraged to buy here by the stock market and currency instability?
- How real is the economic growth, and is there underlying debt (as reported by the Wall Street Journal in December) that could cause Chinese wealth to unravel?
- Will the government lift the $50,000 annual overseas investment cap later this year as anticipated, which could cause a flood of Chinese investment in US housing?
We don’t know the answer to any of these questions, but the future success of many new home communities depends on the answer.
Future success of the resale market also depends on this flow of capital.
What do you think will happen?