Aug252014

Chinese government policy change kills Coastal California housing market

Coastal California housing demand from Chinese nationals surged in recent years; however, Chinese officials abruptly shut down this source of demand.

Chinese_freedom_support_California_real_estate1The 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.

Chinese Investors Fuel California Housing Bubble

Wealthy Chinese are gobbling up real estate in the Bay Area, but local opposition and an impending bubble signal danger.

By Jack Detsch, August 16, 2014sliding_house_prices

… Chinese … Investors are descending upon the region (Bay area) in huge numbers: about 35% of Chinese residential real estate purchases in the U.S. occur in California, according to a study conducted by the National Association of Realtors. The same survey found that Chinese investments in U.S. real estate amounted to $22 billion in the year ending in March 2014, making up almost a quarter of foreign purchases. …

That has led to a burst in Chinese investment in condominiums and single-family homes. “Condominiums generally reflect the property type that these homebuyers are familiar with, and single family homes are the type of properties that resemble the picturesque American dream.” Osmundson says.

Nonsense. Professional Chinese investors are buying large commercial properties with cashflow. Novices, amateurs, and the kool-aid intoxicated are buying Coastal California properties because they don’t have the sophistication to examine other types of better performing investments. Large numbers of small investments in real estate with poor cashflow is a sign of a bubble mania, or in this case, the export of profits from a similar bubble mania in mainland China.

During the housing bubble, California equity locusts went to other cities across the West and inflated prices where real estate values had no other reason to rise. Bend, Oregon, Boise, Idaho, Las Vegas, Nevada, and many other cities saw substantial property value inflation due to California buyers purchasing second homes and investment properties. The influx of Chinese buyers is the same phenomenon but with different players in a different location.

China-Real-Estate

That dream is becoming much more appealing to Chinese buyers and speculators, with housing getting tougher to come by back home. …

WTF is he talking about? Property is scarce in China? The Chinese housing bubble will go down as one of the grossest misallocation of resources ever, with millions of houses empty because nobody works where they were built. (See: More Than 1 in 5 Homes in Chinese Cities Are Empty, Survey Says)

For high net-worth Chinese who have assets of anywhere from $1.6 million and up, buying a single-family home or condominium looks like an increasingly good long-term investment: Bay Area housing prices surged by 2.4 percent in May.  …

Chinese mega-rich are investing healthy sums in these properties, betting on the long-term appreciation of the market. With local politics getting shakier and prices nearing the previous peak of their surge, that might not be as safe of a bet as they think.

facadeThe reporter missed the real reasons Chinese buyers want Coastal California real estate. These are novice buyers obtaining an asset they somewhat understand because they lack the sophistication to buy larger or more complicated real estate deals, just like the California equity locusts of the housing bubble. Chinese buyers have money from their own real estate bubble, and they are desperate to shelter their assets outside of China because they fear the deflation of their own bubble, and they want to hold assets outside of the reach of the Chinese government — at least they hope it’s out of reach….

China Cracking Down on Money Laundering to Buy Real Estate in CA

by Chriss W. Street 18 Jul 2014

China is cracking down after the CCTV state-owned broadcaster secretly recorded a state-owned bank executive bragging that the bank illegally provides in-house money laundering services for wealthy Chinese nationals to violate currency controls and buy real estate in “world cities” as their off-shore safety deposit box.

The Chinese have been driving up high-end real estate prices with all cash purchases in California’s Orange County, Vancouver, New York’s East Side and Sydney’s Gold Coast. But with CCTV exposing tens of thousands of wealthy Chinese for criminal money laundering, the Communist Party leadership may demand real estate be sold and the laundered money returned home.

This is exactly the worst-case scenario I’ve been warning about. The deflating Chinese housing bubble could turn local real estate buyers into desperate sellers because the Chinese government may forcibly repatriate this money. No decision has been made yet, but if the Chinese government gets serious about this, not just will the demand evaporate, the market could be flooded with must-sell inventory from Chinese nationals.

china-debt-cartoon

The crackdown in China is underway after the dominant state-owned CCTV, China Central Television, aired undercover footage showing a Bank of China executive explain how for a fee paid to the bank would illegally wire any amount over the legal limit of $50,000 to an off-shore account.

The CCTV 20 minute report includes a “sting” section where a BOC banker states, “We don’t care where your money is from or how you earn it, we can help you get it out of the country.” The banker added, “We don’t care how black your money is or how dirty it is, we will find ways to launder it and shift it overseas for you.”

According to the South China Morning Post, the BOC was “blatantly offering money laundering services” and fabricating information through its in-house money transfer platform called Youhuitong. BOC teamed up with immigration agencies to disguise the origin of clients’ money and helped them “send funds overseas for “investment immigration.”

There will probably be a few public executions of bankers in China so the government can show they are doing something about the corruption. Too bad we couldn’t do that here in 2008. A few should have been beaten down, at least that’s what Jesus would have done….

what-would-jesus-do-with-bankers

The Chinese authorities have been trumpeting their infrastructure investments in Africa, Middle East port investments and leadership and their recent leadership in founding of a BRICS Development Bank. But talk to any real estate broker around the developed world and she will tell you that high end properties will never stop going up in price because rich Chinese will continue to bid up sales prices with all-cash offers.

It’s a collective delusion and a failure to grasp how quickly and easily a policy change in Beijing could reverse that flow of money.

The CCTV’s attack on the Bank of China came as a shock to China analysts after the State General Administration of Press, Publication, Radio, Film and Television issued a directive on June 19th banning media organizations from making “critical reports” against major government institutions without prior approval. State-owned media had been embarrassing the government by heavily criticizing Chinese ministries and law enforcement for failing to solve the disappearance a Malaysian Flight to Beijing in March with 153 Chinese citizens.

BOC and CCTV are both so-called “central enterprises” directly under the supervision of the State Council. For CCTV to release such detailed and serious accusations against state-owned bank must mean that CCTV obtained prior approval to air the segment. The latest accusations of money laundering are extremely serious because they are institutional in nature, rather than about one or two corrupt officials. …

This is probably a sign that the Chinese government is laying the groundwork for repatriation of these assets. By allowing these segments to air, they will inflame public opinion against the wealthy who moved their money out of the country. With a populist backlash to assist them, the Chinese government will face little resistance if they wish to implement a major repatriation program. The wealthy Chinese who would oppose such a measure would be thrown to the angry mobs.

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Chinese prosecutors are undoubtedly combing through Bank of China wiring instruction files to nab huge numbers of money laundering violators. Don’t be surprised if those all-cash Chinese real estate buyers start dumping their off-shore properties.

What happens if the Chinese buyers that represent 5% to 7% or our housing market become sellers instead of buyers? What if the pretenders who borrowed their way to prosperity (yes, some Chinese did this too), what if they need the money to make debt-service payments? What if the Chinese government demands repatriation of overseas money under threat of execution?

Those who don’t have issues with debt will likely be very happy they parked their money in California real estate, and they will hold their properties, assuming the Chinese government allows it; however, the ones who ran personal Ponzi schemes will implode, sell their properties to meet their financial obligations, and potentially disrupt our real estate market in the process. If a significant portion of our demand suddenly becomes must-sell supply, that will not be a boost to home prices.

The implications for Coastal California’s real estate market is enormous as a crash in Chinese real estate would not just remove a component of local demand, it could turn Chinese buyers into desperate sellers. My sanguine attitude about the ability of lenders to maintain pricing through inventory restriction would change if desperate Chinese sellers began putting must-sell inventory on the market.

This is an issue that could potentially cause a housing crash in California. Most economists will call it a black swan as if this was some kind of unforeseeable natural disaster. This wasn’t an asteroid impact, it was triggered by the collapse of the largest and most obvious financial bubble in human history. The crash in Coastal California, if it happens, will be collateral damage from the downright devastation in China.

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