China Could Deliver Another Blow to the U.S. Housing Market

A Government Crackdown

By Harry Dent, Economy & Markets Daily:

The New York Times ran an article on Sunday talking about how the Chinese invasion of U.S. real estate is only expanding. They aren’t just buying condos in Manhattan or McMansions in Silicon Valley – they’re buying properties in new developments in places like Plano, TX, just north of Dallas.

In the market for homes over $1 million, the Chinese make up one out of every 14 buyers – which is huge. In the top tier markets in San Francisco, Orange County or Manhattan, they can be 50% or more!

In the past year they paid $831,800 on average for an American home for a total of $28.6 billion. That’s more than double their level just two years prior!

The next biggest buyers, Canadians, only spent $380,300 on average. The average U.S. buyer: just about $250,000.

As you can imagine, a lot of Americans in these cities the Chinese are buying into aren’t much too happy. With that kind of buying power, they’re jacking up costs across the board. But it gets worse.

69% of their purchases are entirely in cash. Local buyers can’t do that! They have to apply for a mortgage. So they’re pissed off because so many Chinese can close a deal in a weekend.

But we need to consider why the Chinese are trying to get the hell of out dodge in the first place.

Many know like I do that China’s economy is a time bomb, so they’re trying to get their money out – especially before, worst case scenario, the government starts taking it.

Others just want to get their kids into American high schools or colleges to give them a world-class education. And some are just escaping the growing smog!

There’s also the fact that since 2009, U.S. real estate has only become more attractive as Chinese property got more expensive. So this trend of the Chinese buying over here has just accelerated since.

And it shows in the exodus of money coming out of China in the chart below.

Money Is Pouring Out of China

You can see it started to heat up between 2012 and 2013, and going into 2015 it’s just been berserk! (Though we have data only up through Q2.)

The New York Times articles argues that the Chinese government has been making it easier for affluent Chinese and corporations to move money overseas. And the U.S. government helps by offering EB-5 Visas or green cards for foreigners who invest $500K to $1 billion in projects that employ at least 10 people. In fact, 86% were granted to Chinese last year!

But it finally seems like the Chinese buying might be slowing down. That’s the point of another article in The Wall Street Journal by Laura Kusisto and Alyssa Abkowitz, which is more in line with what I’ve been hearing.

They’re saying in recent months the Chinese government has been making it harder to get money out of China. The government is cracking down on the $50,000 per year limit they enforce on transferring money overseas. Up until now, people have been pooling money through friends, relatives, and employees to get around that limit.

And then there’s the fact that China’s stock market crashed. That’s made the Chinese more cautious about any and all investments. Real estate agents have noticed a marked decline since.

So the question is – will this stall be more temporary or more permanent?

First, I think the government is going to crack down even more seriously about the money flowing out of their country.

Outflows recently totaled $580 billion in 12 months. How can you continue to let your most affluent take their wealth out of the country under the guise of their kids’ education?

But more importantly, I think another shock is coming to China’s stock bubble burst. And that will create more uncertainty among the affluent. They can’t be feeling too secure about their financial assets, and some are already getting less comfortable with speculation.

My forecast: Look for another stock crash in China starting by late January. And then an acceleration of the real estate crash in China that has already begun.

This happened with the Japanese in the early 1990s…

When such a crash and implosion of wealth happens where it really matters – real estate – it will cause global speculation to come to a halt, and fast.

And that means curtains for many of the bubbliest cities around the world… even Plano, TX. By Harry Dent,  Economy & Markets Daily

Housing Bubble 2 comes full circle. But this time, it’s even bigger. Read…  Subprime “Alt”-Mortgages from Nonbanks Run by former Countrywide Execs Are Booming Again

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  25 comments for “China Could Deliver Another Blow to the U.S. Housing Market

  1. matt says:

    Here is what I have been noticing on my news feeds. In D C the market for homes over 1.5 million has crashed to almost 0 home sales the past 2 months. They are not moving. The price for homes in the Phila area have been dropping like a rock as people now are balking at sky high prices. . down avg of 12 pct past 2 months. In Harford CO where I use to live Homes have been vacant and for sale for almost a year near across the street from my mother in laws house. They say it is a supply problem? I say they are full of B S. people who wanted to buy a home have and who wanted to refi have. Those who have been paying attention to what is going on in the markets both economic and housing got out at the top .

    • Petunia says:

      I was wondering when the Philly real estate market was going to stop appreciating. I read Philly magazine occasionally and since last year all my old favorite stores have closed. The fashionista boutiques in town and on the mainline are all closed now. Back when I lived in PA, Philly had better shopping and dining than NYC.

    • Gee says:

      Matt – same thing in Brooklyn. The prime streets in Boeurum Hill (where Ethan Hawke bought for about 4mil recently) were going like hotcakes early this year, anywhere from 5 to 10 sales a month in the 3-4 mil range. Since early October, almost none anywhere in the nicer (if you can say that) parts at all. Just dead. I tried to explain this to my relative who is trying to sell there. You see, these are existing homes, so what would be closing now is based on what happened about three months ago. And it is 3+ months ago that the US market started stinking it up and China;s stock market went poofypoof. For a while the argument was that the downturns in stocks would push money to real estate, but I tried (in vain) to tell people that that kind of shift only works for a short period, and eventually, the money just dies, the wealth illusion cant be transfered because it doesnt exist. And hence, now you see the market is dead in the US (and London, and a few other high end places.) And now that the VC money is starting to get the screws applied, San Francisco will be next. But non-prime Oakland will get buttfracked again first.

  2. Chuck says:

    Sorry I couldn’t figure if this quote was dry humor or an in your face joke..

    “Others just want to get their kids into American high schools or colleges to give them a world-class education.”

    Our schools suck, they are only getting worse.
    Between teaching 5-7 year old kids about sex, oral and other..
    the wimpy state of high and collages and the idiots they produce..

    Sad years with a horrible future ahead of those idiots.

    • Wolf Richter says:

      I think Harry was talking about universities, many of which are world class – and very expensive, particularly for foreign students. It’s a booming business.

      • Gee says:

        Yup. But the only schools that they want to get in now are the ones that have the pedigree, as most of the rest of the dreck are just overpriced diploma mills that feed the administrative and structures costs. That whole situation just makes me want to cry. When you look at what college administrators make. It’s surreal.

  3. Vespa P200E says:

    “My forecast: Look for another stock crash in China starting by late January. And then an acceleration of the real estate crash in China that has already begun.

    This happened with the Japanese in the early 1990s…”

    Correctamundo – history does repeat in rather uncanny ways…

    Chinese money chasing high end homes in US in last couple of years mark the peak of housing – ohj wait that’s what Japanese did with commercial real estate just about the time they crashed ushering in RTC (for those old enough to remember). Except this time the all cash buyers bear the burden to WHOLE loss.

    RE, stock and bond market bubbles may start to pop and lose air only for the lemmings to see then the onslaught begins, like clockwork from 2000, 2008, etc.

    • jim says:

      Work in the DC area in the motorcoach business. You can not believe the explosion of bus companies (Chinese owned) that popped up in the area about 4 years ago. I’ve been in the business for over 25 years and it is generally obvious to me when a new company secures a large number of brand new buses (valued over $600,000 apiece) without any prior experience; that something smells. Their clients come and go, paying cash for everything. I’m convinced that these operations are in some form or another laundering money.

      • MC says:

        Sounds a bit like the Chinese-owned big box stores we have here.

        They are huge, in prime locations and well stocked with top brand products at bargain prices. They still lack licenses to sell food, but they’ll get there eventually. Councils desperate for money will cave in once a big enough wand of cash is waved under their noses.

        I asked myself the same question: where does the money come from and how do they stay in business? Something’s not quite right. If some local with no prior experience started opening such big shops left and right he would become an instant target for our version of the IRS which would stay on his neck until they managed to find anything to fine him.
        Not a peep here instead…

        I suspect our own governments, which are so desperate for revenue they would stop at nothing (including outlawing their own money), are closing both eyes and turning the other way when these Chinese funds of dubious origin enter their countries.
        Western governments have gone after “tax havens” for decades with a ferocity worthy of a junkie looking for change in his neighbor’s house, but are becoming tax havens for the Chinese themselves… the bitter irony!

      • Vespa P200E says:

        It’s the “investment” Chinese are making to obtain the highly coveted green card called EB-5 where the investor and their family gets the card for investing $500k or $1mil in investing in business to create jobs – sounds like it is working or something…

  4. Cae says:

    We’re 8 years from the crash and at the lowest mortgage rates in history, cash purchases have been huge for the last few years. Now, the fed may actually start to raise rates and cash buyers are drying up….sounds like party is about over.

    • Jim H says:

      Here in N. Berkeley two homes recently went up and sold fast. Both were swarming with Chinese viewers the day they were on display. Will be interested in how much over the ask of $1.6M and $999K they sold for, and if or how fast they’re occupied. Friends in SF report numerous properties remaining empty after they’re sold. Hope Dent is correct that it may slow down.

  5. Sabbie says:

    I think the authorities cannot stop the outflow from China. There are just so many schemes to get the money out. And there are so many people in China with money. China must devalue its currency, so these folks would have to be crazy not to buy hard assets like real estate or gold while they still can. And US real estate is much harder to confiscate than gold.
    Personally, I think we should implement a hefty tax on RE purchases by non-US citizens. But the Realtors would never have it.

    • Les Francis says:

      My wife who is offshore ethnic Chinese has friends who are former Chinese Citizens now living in Australia and now owning an Australian passport.
      A few of these Australian passport ex Chinese citizens wanted to go to China for a visit. They require a visa to visit the country of their birth.
      It’s getting increasing difficult for them to obtain a visa. New requirements on the visa application include making a declaration on how assets were obtained in Australia and where did the money come from to finance these.
      Those with Million dollar plus homes are being asked how where these dwellings financed. The 50,000 dollar limit is being bought up.
      Some people are now reluctant to apply for the visa.

      • NotSoSure says:

        In Australia maybe. My manager and co workers are mostly Chinese here in a San Francisco company. A bunch of them have just gotten new visitor visas for 10 years.

  6. Kam says:

    Government “policy” of letting in hot, dirty, elitist money to buy real estate and crowd out their own working citizens is planting seeds for resentment.

    How can working people compete with the Chinese owners of slave labor factories, communist party bribe money, and plain, old in your face extortion money.

  7. Kreditanstalt says:

    Out of the frying pan into the fire…

    The United States?? Perhaps fleeing Chinese should display a bit more perspicacity and show more interest in the prospective future path of governance in their destination jurisdictions…

    Asian countries – Taiwan, Malaysia, Singapore, HK, Indonesia, Ceylon – exhibit a much more ‘hands off’ attitude toward private wealth than do western social welfare states…all of which a potentially insolvent.

  8. pogohere says:

    Chinese money has been fleeing China for millenia. See: Seagrave: ¨Lords of the Rim¨

  9. Ed says:

    In Australia, Australian buyers are being smashed whilst Chinese buyer illegally hoover up homes to just sit vacant and rot displacing families and jacking prices through the roof and families that do buy into debt servitude for a house 50kms fom cbd.
    New zealand is the same.
    But to much vested interest to stop it with speaking out making you racist…..
    All we can do is hope the chinese government stops it because we wont.

  10. Shorebreak says:

    It will take an unmitigated disaster to end this trend in Silicon Valley. Wealthy Chinese just keep on paying top dollar for properties and why should they stop as long as the for sale signs go up? Top-notch schools and venture capital keep pouring money into start-ups there. It continues to be place to be and invest.

    • Petunia says:

      The employers in Silicon Valley will hit a recruiting wall at some point. Nobody wants to live in a place that takes half your pay in taxes and the other half in housing costs. When the big employers start expanding outside the area you will know it is over.

  11. MAS says:

    Funny isn’t it, how a foreigner can’t buy property in China, but here we are so stupid that we let foreigners buy us out till our own citizens are out on the streets. And then here’s the kicker, if anyone says something negative about it, our politically correct Liberal MORONS cry racism !!

    Consequently, no person, body or organization has the right to buy, sell or transfer ownership of land. Instead, they can pay land usage rights for an agreed-upon, but limited, period.

  12. Nicko says:

    “When such a crash and implosion of wealth happens where it really matters – real estate – it will cause global speculation to come to a halt, and fast.

    And that means curtains for many of the bubbliest cities around the world… even Plano, TX.”

    I see no downside to this whatsoever. USD$ and US stock-markets will surge. Americans (and even a few Canadians) will benefit from a fall in RE prices. Win-win.

  13. ManAboutDallas says:

    You don’t understand China, Mr. Richter; you never will. It’s probably better that way.

    • Wolf Richter says:

      I don’t even understand San Francisco where I live, nor do I speak the dominant language when I go to my neighborhood Safeway (Cantonese).

      BTW, the author of the article is Harry Dent.

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