Despite recent attempts by government officials, China’s real estate sector is on the precipice of a potentially significant recession. According to two independent surveys, housing prices across the entire country fell 0.3 percent in August. While on the year housing prices are actually up 4 percent, they have now declined for five consecutive months. Of particular concern, however, is the impact the state of the Chinese housing sector may have on the United States. In a world where an increasing number of Chinese citizens purchase property in foreign markets, a collapse in their real estate sector may result in subsequent scares around the globe. Fortunately, that doesn’t appear to be the case. The recent drop in Chinese real estate may be great news for homeowners and investors in the United States. Unable to invest money in their own country with any sense of confidence, Chinese citizens will look to U.S. markets, serving as a boon for those already owning property.
At the moment, China’s economy is highly dependent on its real estate sector, which makes up a whopping 16 percent of the entire country’s gross domestic product (GDP) growth. A particular emphasis has been placed on Chinese real estate, as the stock market is in a rather precarious position. China’s citizens, who remain reluctant to invest in such a volatile stock market, redirect their savings towards real estate. For the moment, it is a safer vehicle for growing wealth.
The push towards real estate has generated a real estate frenzy. Developers throughout China have almost singlehandedly kept the economy buzzing. However, experts fear that such actions will lead to an inevitable bubble. Fears were legitimized when the government began tacking action. Within the past year, Beijing has imposed controls in an attempt to cool down the real estate market, through limiting domestic housing purchases and raising down payment minimums.
Unfortunately for those Chinese citizens that are heavily invested in real estate, a tempered market leaves little room to invest their money. Government controls have made it increasingly difficult to increase profit margins. The Chinese government imposes strict controls on how much money Chinese citizens can remove from the country, limiting each individual to $50,000. But people can navigate said restrictions by collaborating with others. “Through swapping bank accounts and other methods, Chinese people can often get as much as a million out of the country,” said Patrick Chovanec, an expert in the Chinese economy at Silvercrest Asset Management. As a result, many Chinese investors have sought refuge through overseas investments.
Having made their sentiment known, the purchases of homes in the U.S. by Chinese investors have surged. Real estate purchases by Chinese citizens increased 50 percent in the year up to March 2014 and now total $22 billion in value. In fact, the U.S. government has even established several initiatives to lure Chinese money into U.S. markets. Washington issued 6,895 EB-5 visas to Chinese citizens who invested at least $500,000 in the U.S. housing sector. That number is considerably high, as South Koreans were the next highest recipients of EB-5 visas – with a mere 364.
On top of government issued visas, other institutions have begun luring Chinese investors, hoping their activity will serve as a boon for the entire U.S. economy. Even Zillow, a popular listing website, has signed deals with Beijing real estate firms to make property listings more readily available to Chinese buyers. Everyone appears to be going out of their way to facilitate Chinese investments.
As perhaps one of the biggest reasons for attracting Chinese buyers, is their propensity to gravitate towards higher end properties. On average, the median Chinese home investment is approximately $523, 148. By comparison, housing purchases by Canadians, who come from a far wealthier country, averaged only $212,500 per home purchase.
Should Chinese investors focus their attention on the U.S., Chovanec said, Chinese money — much of it invested in real estate — would have a huge impact on large metros like New York City, San Francisco and San Diego. A surge of Chinese real estate investment in U.S. cities would be a boon for property owners.
“It’s worth thinking about what the asset classes are that would receive all these capital outflows, and there’s one big answer: property markets,” he said.