Jan302017
Chinese government decree prohibits investment in foreign real estate
State Administration of Foreign Exchange requires all buyers of foreign exchange to sign a pledge that they won’t use their $50,000 quotas for offshore property investment.
It’s really happening. The outflow of capital from China prompted the decree to stop Chinese Nationals from investing money in offshore real estate.
In several posts I describe the twin threats to the US housing market: rising rates, and reversal of flow of foreign capital. Rising mortgage interest rates will affect the entire housing market, but a reversal of flow of foreign capital will most strongly impact coastal housing markets. In particular, if the influx of Chinese capital were to stop coming in and actually reverse, Coastal California, and especially Irvine, would be most at risk.
In 2014 in Chinese government policy change kills Coastal California housing market I wrote:
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 Chinese investors are a permanent fixture of the real estate market. The United States is a safe haven for Chinese investors, many of whom recognize their own market is a massive bubble. However, these investors must wire money out of a Chinese bank to an overseas location, and the Chinese government could prevent these transfers if it so desired.
The government hasn’t gone nuclear on overseas investors yet. They could scrutinize every wire transfer leaving the country if they wanted to. Instead, they chose to issue a decree telling investors they can’t spend their yearly allowance of $50,000 on real estate.
Of course, it’s very difficult to know exactly what this money is ultimately invested in once it goes overseas, but by issuing this decree, for those unlucky saps who get caught, the consequences could be dire. Fear of what the government could do will deter many potential investors from buying their little piece of California.
China’s Army of Global Homebuyers Is Suddenly Short on Cash
Bloomberg News, January 26, 2017,
China’s escalating crackdown on capital outflows is sending shudders through property markets around the world.
In London, Chinese citizens who clamored to purchase flats at the city’s tallest apartment tower three months ago are now struggling to transfer their down payments. In Silicon Valley, Keller Williams Realty says inquiries from China have slumped since the start of the year. And in Sydney, developers are facing “big problems” as Chinese buyers pull back, according to consultancy firm Basis Point.
“Everything changed’’ as it became more difficult to send money offshore, said Coco Tan, a broker associate at Keller Williams in Cupertino, California.
That doesn’t sound promising. If local real estate agents already notice a difference, then the problem is for real.
Less than a month after China announced fresh curbs on overseas payments, anecdotal reports from realtors, homeowners and developers suggest the restrictions are already weighing on the world’s biggest real estate buying spree. While no one expects Chinese demand to disappear anytime soon, the clampdown is deterring first-time buyers who lack offshore assets and the expertise to skirt tighter capital controls.
The big fish won’t be hurt by this, but the families and individuals of modest means — the profile of a typical foreign homebuyer in California — the little guys will stop buying.
“If it’s too difficult, I’m out,’’ said Mr. Zheng, 66, a retired civil servant in Shanghai who declined to give his first name to avoid attracting regulatory scrutiny. He may abandon a 2.4 million yuan ($348,903) home purchase in western Melbourne, even after shelling out a 300,000 yuan deposit last August. He’s due to make another big payment next month.
Many countries are weary of the inflow of Chinese buyers. Vancouver, British Columbia, Canada, recently instituted a huge tax to discourage foreign investment. The problem has long been recognized in Australia, where Mr. Zheng was planning to invest, and similar taxes may be forthcoming.
The change spooking Zheng and his compatriots came in a statement from the State Administration of Foreign Exchange on Dec. 31, hours before the reset of Chinese citizens’ annual foreign currency quotas. Among other requirements, SAFE said all buyers of foreign exchange must now sign a pledge that they won’t use their $50,000 quotas for offshore property investment. Violators will be added to a government watch list, denied access to foreign currency for three years and subjected to money-laundering investigations, SAFE said.
How much more explicit can they be? If you were a citizen of China, would you want to be on a Chinese government watchlist?
“A lot of clients are worried and have started hesitating,’’ said Wang Ning, vice president of the international department at Fang Holdings Ltd., China’s most popular property website. While the regulator has long banned the use of foreign currency for real estate, its call for additional documentation was seen as a signal that the government is serious about cracking down. …
Many investors will probably carry on with business as usual and see if the government is serious. Given the severity of their capital outflows, the government may be forced to be more restrictive.
While Beijing’s policy tweak may appear symbolic on the surface, it’s likely to cause a “notable reduction” in Chinese purchases of Australian property …. Australia approved A$24 billion ($18.1 billion) of real estate investments from China in the fiscal year ended June 2015, the most recent figures available, making the country by far the biggest source of foreign buyers. …
Even with tightened capital controls, brokers say motivated Chinese investors can usually find ways around them.
Everyone selling real estate in Coastal California certainly hopes so.
Sellers here don’t want to suffer the fate of Vancouver.
No down payment loans available in Calif. – but at a price
This might be your lucky day if you have been looking to buy a place for yourself, you have a decent paying job, a middle credit score of at least 640 but you don’t have the down payment or the closing costs.
The California Housing Finance Agency, or CalHFA, offers either a Federal Housing Administration first trust deed named CalPLUS FHA that requires 3.5 percent down or a conventional first trust deed named CalPLUS Conventional that requires 3 percent down.
The residential property must be a single-unit, owner-occupied home, and the maximum sales price allowed for Orange County is $600,000. Previous or current property ownership is allowed as long as you can prove that you have not resided in any property that you have owned for the past three years.
A “silent second” loan called My Home Assistance covers the down payment. (The second is considered silent because it’s a recorded second trust deed requiring no payment, accruing at a 2.5 percent simple interst rate.)
A silent third trust deed called ZIP 3rd (with no payment and no interest) covers most or all of your closing costs.
Separate income caps for FHA and conventional financing are in play to qualify. You can find them at calhfa.ca.gov.
One example: FHA’s Orange County income cap for a family of four is $117,700. That said, this FHA program allows non-occupant co-signors to help you to qualify, but those co-signors don’t count against the income cap. Only the incomes of the loan applicants (who do not have to be married or related) count against the income cap.
In the last two years, just 139 of these loans have been funded in Orange County, compared to 805 in Los Angeles County, 834 in Riverside County and 779 in San Bernardino County, said Eric Peterson, CalFHA’s spokesman.
The CalHFA Zip 3 interest rate of 4.375 percent is roughly 0.50 percent higher than comparable and commonly available Orange County FHA interest rates.
This program could see a lot more volume if it reduced its interest rate. And, more importantly, borrowers have to pay the FHA or conventional mortgage insurance. So, is this interest rate markup fair and affordable, even considering it’s a zero down loan?
This is good. Hard working recent college grads with limited access to down payment funds need a break to enter the housing market, or they will pack up and leave. OC needs a steady supply of new educated workers who want to buy homes.
The cost of these loans is high, and the limit will not get someone into a median priced home in Orange County. In fact, it won’t even get into a small condo in more desirable areas. It will open the door for a few that make really good money, but it won’t open the floodgates like 100% financing with no-doc option ARMs did.
Over the next several months, people are going to hear a lot about the following:
Cash crunch.
Housing to tank hard soon, especially in BUBBLE cities like Irvine. Too bad.
The next recession will be delayed to pin the recession on Trump.
Because of this, the earliest I see the next recession is late 2018… but more likely it will be 2019.
Ideally they will delay it to pin it on him right before the election year.
Since mortgage equity withdrawal has been far less prevalent since 2008, our economy doesn’t depend on steady infusions of borrowed money from high-priced real estate markets like Coastal California. I think that’s a big plus for the economy because if house prices stop going up, or actually go down, we won’t see a large economic prop removed from the local economy.
It won’t be like 2008 for sure. I expect it to be even softer than the early 1990s.
They? Is there some secret cabal that has the power to time recessions? Really?
Silly me to think the central bankers and shadow government is orchestrating it all.
Nah it’s free market haha
Those of weak intellectual character are the believers of conspiracy theories. It helps the powerless to cope with a chaotic and random existence to think there is order – even if the order pulling the strings behind the curtain is “evil”.
Evil central bankers and “shadow government” is irrational thinking.
Most conspiracies are false but some turn out to be true. For instance, if you had said the NSA was monitoring phone calls in the past (as I used to), they would have said you were a nutty conspiracy theorist, but thanks to Edward Snowden we know this to be true.
There is only one word that describes the bidding for decent coastal locations. Fierce. That is the current situation. Many expected that the rate increase and less foreign demand translated into a housing price stall. Instead, the bidding is intense.
Yep! That’s why we need a 15% foreign buyer tax in California, like they setup in Vancouver.
Awesome news!!! But, we should still have a 15% foreign buyer tax setup in California to help level the playing field for locals attempting to purchase homes here.
I’m sold on the idea. I suspect the builders and developers who count on these foreign buyers won’t be so pleased by the idea.
If something like this comes to pass, it will be in San Francisco where the housing problems are the worst, and the building and development community is weaker.
Does anybody see the irony of opposing Trump’s immigration ban while supporting a 15% tax on foreigners?
One man’s irony is another man’s hypocrisy.
No, not at all. I’m all for people who want to come here, build a family and become tax payers. However, I’m less inclined to have people overseas with boatloads of cash buy up residential real estate only to leave it vacant or rent it out. We lived in a rental like that in Long Beach a long time ago. The guy visited the US three times a year and had rentals everywhere. Our house was an old craftsman. Very cute but it turns out that he put in appliances without ever upgrading the original cloth wiring. Sparks would fly when we changed light bulbs and fuses blew constantly. And that guy was making bank. How much was he paying in taxes? How much did he support our economy. Not much is my guess.
People who buy homes here but don’t live here are treating our residential real estate like a good stock to own. And that attitude is driving up prices. They aren’t shopping in our stores or going to our doctors or eating in our restaurants. That’s why the Vancouver law makes so much sense. I’m not sure about the 15% tax (although I do think that evening the playing field is an important concept), but I really like the stiff financial penalties for leaving properties vacant (10k a month and then 10k a day if there’s no compliance!). If people are buying here to live here, that’s one thing. If it’s just an investment, then I’m not so sure.
But the issue is certainly not clear cut. I feel this way because I want a less expensive home. But if I were in the market for commercial real estate or a soybean farm, I might feel quite isolationist about that as well. A 15% tax would not be terribly prohibitive for the those from overseas who are buying a home for the purpose of living in it in Newport. But it might give pause to those buying up huge swaths of middle income property only to sit on it or rent it. At least it would allow people in the community a chance to stay. Another one of our friends is moving out of state, this time to Texas. All because of the cost of home ownership.
Katy +1
They can prioritize this all the want. The Republicans in Congress can propose whatever they want. They will never get past a Democratic filibuster in the Senate, so as Shakespeare would say, “The way to dusty death. Out, out, brief candle! Told by an idiot, full of sound and fury, Signifying nothing.”
Pence, Hensarling: Dismantling Dodd-Frank remains a high priority
During the presidential transition, Trump’s transition team stated that dismantling Dodd-Frank would be one of the president’s main priorities.
And on Thursday, the American public got a reminder that the president and his party plan to keep that promise.
Speaking before the Congressional Republican Retreat, Vice President Mike Pence said that dismantling Dodd-Frank and its “overbearing mandates” remains a top priority for the Trump administration, a statement that was greeted by applause from the collected Republicans.
After Trump and Pence spoke to the GOP retreat, House Financial Services Committee Chairman Rep. Jeb Hensarling, R-Texas, issued a statement saying that he intends to continue pushing for the replacement of Dodd-Frank with a new financial reform package.
Last year, Hensarling introduced the Financial Choice Act, a Republican-crafted Dodd-Frank replacement that would “end taxpayer-funded bailouts of large financial institutions; relieve banks that elect to be strongly capitalized from ‘growth-strangling regulation’ that slows the economy and harms consumers; and impose tougher penalties on those who commit fraud as well as greater accountability on Washington regulators.”
On Thursday, Hensarling said that he will advance the Financial CHOICE Act in the new Congress.
“No bureaucrat in Washington should be able to tell hardworking Americans what kind of credit card, bank account, mortgage or retirement advice they can have, but that’s exactly what Dodd-Frank does,” Hensarling said.
“As the president and vice president have said, Dodd-Frank makes it harder for people to get loans to buy a home or start a small business. Consumers are paying more in fees and are losing benefits and access to services they want and need,” Hensarling continued.
“Instead of ending ‘too big to fail,’ Dodd-Frank institutionalizes bailouts for big banks. Dodd-Frank’s regulations give Wall Street a competitive advantage over community banks and credit unions,” Hensarling added.
Hensarling said that he plans to “dismantle” Dodd-Frank this year.
“Fulfilling the Trump Administration’s pledge to dismantle Dodd-Frank this year is essential to leveling the playing field, building a healthy economy and offering every American greater opportunities to achieve financial independence,” Hensarling said.
“Republicans on the Financial Services Committee are eager to work with the president and his administration to unclog the arteries of our financial system so the lifeblood of capital can flow more freely and create jobs,” Hensarling continued.
“The Financial CHOICE Act, our bold and forward-looking plan, replaces Dodd-Frank with new policies to protect consumers by holding Wall Street and Washington accountable, end bailouts and unleash America’s economic potential,” he concluded. “Replacing the Dodd-Frank mistake is necessary if we ever hope to enjoy a healthy economy and make America great again.”
Market apologists feverishly spin December’s bad news.
Housing experts: December’s drop in home sales is business as usual
December’s new home sales came in a full 10% lower than November, however, experts aren’t worried.
One expert who served as the CEO for Fannie Mae for more than 20 years explained that it’s not unusual to see volatility in winter months.
“Home sales are often volatile in the winter months, as weather matters a lot, and December’s decline is probably mostly a result of this volatility rather than a drop in the underlying fundamentals for housing demand, despite the rise in mortgage rates,” Nationwide Chief Economist David Berson said.
As another expert puts it, taking the long view is a more accurate picture of where the market is.
“New home sales is a notoriously volatile number, so don’t read too much into it,” Brent Nyitray, iServe Residential Lending director of capital markets, said in an email to clients. “The three-month moving average has been pretty steady for the past six months.”
In fact, many experts were more focused on the year as a whole, which showed a 12% increase in new home sales over 2015.
“New home sales in 2016 were the best in nine years, reflecting a combination of solid demand from homebuyers and new homebuilding that has reached post-recession highs,” Trulia Chief Economist Ralph McLaughlin said.
OwnAmerica Founder and CEO Greg Rand explained that month-over-month sales are irrelevant, and that what really matters is the annual comparisons.
When I told my agent about this, she said…”That makes so much sense!” She says that she hasn’t had a single Chinese buyer in months and that there are many Chinese selling off property in Newport Coast.
I’m hoping this means that more reasonable prices are ahead. We’ll stay put, keep our money dry and see what comes of this.