Rising interest rates will chill Chinese investment in US real estate
Rising interest rates will cause the US dollar to appreciate in value, making US real estate too expensive for foreign investors.
When interest rates go up, the American consumer will find housing less affordable, and as a result, home sales volume will sputter, and lower home prices may follow. How will rising interest rates impact the Chinese real estate investor?
Home sales to Chinese investors began slowing down early this year because the rise in the dollar relative to the Yuan made houses about 10% more expensive. Those that purchased before the dollar rose in value obtained a windfall, but the increased prices made US real estate less attractive to future buyers.
If the federal reserve raises interest rates in December, which it’s widely expected to do, this will likely cause the US dollar to appreciate even more versus other currencies, including the Yuan. If a 10% increase in price this year caused sales to Chinese investors to slow down, what will another 10% increase in price do?
It’s possible anticipation of currency appreciation will prompt even more Chinese investment, but if that were true, we would have seen more over the last six months of 2015. In my opinion, higher prices for Chinese buyers will cause sales to decline even more.
Rising interest rates will chill Chinese investment in US real estate in 2016.
The nation’s economic and stock-market slump puts buyers on the sidelines
By Laura Kusisto And Alyssa Abkowitz, November 27, 2015
Capping a five-year real-estate binge, Chinese nationals surpassed Canadian snowbirds as the top foreign buyers of U.S. homes for the year that ended in March—the most recent annual data. …
Chinese buyers have started to pull back, scared off by China’s stock-market selloff, slowing economic growth, currency devaluation and tightened restrictions on capital outflows. …
Interest from Chinese buyers “went dark” for several weeks after stocks began their sharp fall, said Tom Mitchell, president and chief operating officer of Tri Pointe Group, a home builder in Irvine, Calif. …
Foreign Chinese buyers make up about 30% of customers in a handful of the company’s developments in Orange County and the San Francisco area. Price increases there, he said, have prompted clients to “pause and think.”
This has been a problem for homebuilders all year.
And it’s not due to a lack of new home inventory, which has been piling up all year.
Consider this astute observation from October:
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.”
Zhang Xin, chief executive of SOHO China Ltd., a real-estate developer, said last month she wouldn’t buy overseas real estate today because many cities abroad are too pricey.
In 2016, US real estate will become even more expensive for Chinese investors.
Real-estate consultants and brokers say the pullback likely is temporary.
Of course they do. The entire real estate industry as well as today’s homebuyers are counting on continued Chinese home purchases. 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, and we are already seeing evidence of weakness.
“In the very short term there will be some impact for people who don’t have a foreign income stream or who don’t have a bank account or funds in overseas banks,” said Frank Chen, executive director and head of research at property consultancy CBRE China. “But the outbound real-estate investment trend is likely to remain quite strong.” …
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.
Still, even a temporary pullback could hurt markets where Chinese buyers target some of the priciest American homes, often paying in cash. … One-third of Chinese purchases were concentrated in California for the year ended in March, according to the National Association of Realtors. …
Home builders also could feel the effects. The chief executive of Walnut, Calif.-based Shea Homes, Bert Selva, told investors this month that the company has seen a “significant slowdown” in Chinese buyers in Orange County.
“That buyer is really drying up. To be honest, I don’t think that’s a bad thing, because I think there was a lot of frenzy driven by that, pushing up prices a bit,” he said in a conference call.
This is interesting spin, but nobody thinks it’s a good thing when one of their their largest buying groups disappears.
Chinese and other foreign buyers … have been eager property investors in the San Gabriel Valley in Los Angeles County and in Irvine in Orange County, each with a substantial Asian population. …
Chinese individuals are limited to annual overseas investments equal to about $50,000. For years, Chinese have surpassed that limit, in part, by funneling money through relatives and employees. In recent months, the government has made it tougher to transfer money abroad, said real-estate brokers in both countries.
“It’s like barbarians at the gate,” said John Chang, a real-estate broker with Re/Max in New York City. Chinese families want to buy, he said, but “just can’t get the money out.”
The Chinese government originally built the Great Wall to keep out the barbarian hordes. Now they built an electronic wall to keep Chinese capital in their economic system to support a variety of domestic asset bubbles.
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.
When you consider the various headwinds facing the Chinese economy and the outflow of capital from China, it looks as if the Chinese buying frenzy that inflated Irvine and Orange County house prices has run its course. It’s another reason I believe Orange County home sales will be lower in 2016.