International investing continues to contribute to the U.S. housing sector recovery. In particular, Chinese investments in U.S. real estate have provided an encouraging boost to our economy as a whole. The Chinese have entrenched themselves as the second-largest foreign investors of U.S. housing, as they have spent approximately $9 billion in the past year. Unfortunately, their recent interest in American real estate could have devastating repercussions. Of particular concern, however, is China’s dependency on an ultra-loose U.S. monetary policy directly associated with the housing sector. More specifically, Asia-Pacific’s surging property markets could plummet by as much as 50% when the Federal Reserve starts tapering its purchases of assets.
Countries like China, which have invested significantly in U.S. real estate, are paying close attention to the Federal Reserve.
In an effort to remove the U.S. economy from its previous economic lull, the Federal Reserve began purchasing government bonds to the tune of approximately $85 million a month. In doing so, officials hoped to retain low interest rates while simultaneously encouraging borrowing and investing. Their efforts have been successful, as our economy appears to be on a sustainable track to recovery.
However, it has been announced that these purchases will begin to unwind. Accordingly, the nearly $85 billion that the Federal Reserve is currently spending every month on mortgage-backed securities will begin tapering soon. Some economists fear that we may face significant repercussions from their withdrawal.
Significant changes are expected to impact foreign investors as well. “The Asian housing market has become increasingly dependent on U.S. funding. So if there is one property market in the world where you find dependence on what happens next in the Federal Reserve, it is a market like Hong Kong,” said Steen Jakobsen, the chief economist and chief investment officer at Saxo Bank.
Despite a global downturn, China has been the beneficiary of a rapidly appreciating housing sector. Prices for new homes in the country rose 9.6 percent from a year earlier, according to Reuters calculations based on data from China’s National Bureau of Statistics, compared to 9.1 percent in the previous month.
However, the looming threat of the Federal Reserve tapering the acquisition of securities has caused uncertainty to sweep across China. This, in association with rapid price increases, could be disastrous for China’s real estate industry. The potential tapering of securities may threaten to cause the Chinese real estate bubble to burst, according to Jakobsen.
“The reason why money flows into real estate is that people are increasingly speculating that it will go ever higher, not dissimilar to what we saw in the early part of the crisis in the U.S., and then all through the 2000s. I think we are repeating the same mistakes,” he said.