Jan112016

Will the slowdown in China hurt Irvine real estate?

A rising US dollar makes Irvine homes much more expensive for Chinese buyers, and capital controls makes it much more difficult to move money out of China for those inclined to do so.

great-wall-irvine

Chinese investors buy a significant number of homes in Irvine. Anecdotally, 80% of sales in some new home communities are sold to Chinese Nationals. In fact, Irvine homebuilders depend on Chinese buyers to purchase their overpriced houses, which becomes a problem if this flow of money dries up.

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 an unstable 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.

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. But will they exercise this power and really crack down? If they believed this flow of capital out of China was inhibiting domestic growth, the almost certainly would.

Why China is shaking global markets … again

Dominic Chu, January 4, 2016

In a new year for world markets, the same old story in China has traders on edge.

Investors are worried that China — the world’s second-largest economy — is slowing at a faster-than-expected pace. If the narrative sounds familiar, it is. The same fears about a Chinese slowdown riled global markets last summer.

Data from the Chinese economy has not proved robust.

The latest reads on manufacturing and industrial activity suggest a continued slowing trend. Add to that increasing tensions in the Middle East, and investors face serious headwinds.

China_cartoon_01.05.2015_normal

So what does this mean for Irvine real estate? Weaker sales and more inventory.

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

Typically, homebuilders respond to these conditions by first increasing incentives to drive sales while maintaining the illusion of firm pricing. Once a homebuilder starts lowering their prices, deflationary psychology sets in, and buyers lose all sense of urgency and sales crater.

The Irvine Company typically shuts down its operations for a year or so, then they hit the reset button and start selling again at lower prices — whatever price the market will bear. However, the Irvine Company is no longer the only game in town. Five Points Communities will probably follow the Irvine Company’s lead, but if they felt more pressure to sell, they might continue building and push prices lower, just like Lennar did in Columbus Grove back in 2007 and 2008.

China slowdown to hit luxury real estate

Robert Frank, January 4, 2016Chinese_freedom_support_California_real_estate1

Luxury prices for the world’s major cities are expected to slow by nearly half this year, from 3 percent in 2015 to 1.7 percent in 2016, according to the latest Knight Frank Prime Cities Forecast. The report said China’s economic slowdown is mainly to blame, although rising rates in the U.S. and a slowdown in other emerging markets will also add to the headwinds.

Knight Frank defines the “prime” or “luxury” real estate market as the most expensive 5 percent of homes in each city.

China’s slowdown is expected to hit its domestic housing market hard — as well as nearby markets in Asia favored by wealthy Chinese buyers. Price growth in Shanghai is expected to fall by more than half, from 10 percent in 2015 to 4 percent in 2016. Hong Kong is expected to see prices fall by 5 percent, making it the worst performing market, followed by Singapore, where prices are expected to fall 3.3 percent in 2016.

What we’ve actually seen is that as you get more economic uncertainty within China, the desire of the wealthy Chinese and even the middle class to diversify their investments outside of China has increased,” Bailey said. “It’s a bit counter-intuitive but we’re seeing more demand for money moving outside of China.”

Desire is not demand. Many people in China may want to escape the financial devastation, but unless they can safely get that money out, the desire is not enough to create measurable demand in Irvine.

Along with Australia, the U.S. is also likely to benefit from Chinese flight capital. New York is expected to see prices go up 5 percent in 2016, according to the report, while Miami will see gains of 2 percent. The U.S. may also benefit from high prices and new, less wealth-friendly tax regimes in London.

By that reasoning, Irvine should do well. If this money can escape China, and if Chinese investors don’t consider the prices too high, then Irvine should see one last push of sales before this supply of buyers runs dry.

The question, he said, is whether those U.S. gains will continue, given the potential for higher interest rates and a stronger dollar, which makes real estate more expensive for overseas buyers.

I think there is no question the demand will taper off. It’s only a matter of when.

So the real question is what happens to Irvine real estate when the flow of Chinese money stops?

Jeff Koterba cartoon for July 9, 2015 "China stock market Great Wall"

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