Chinese investors “the X factor” for our housing market.

It’s nothing new for local home prices to soar beyond the reach of most home buyers, but there is something different about this market:  “foreign investors”.  I use quotation marks because it’s my belief that a significant number won’t be foreign for long, and that many are anything but the typical investor, content to bleed an asset dry while living tens, hundreds or thousands of miles away.

Chinese skyline

An article by Richard K. Green, director of the University of Southern California Lusk Center for Real Estate, makes some interesting points about Chinese investors.  Some you may already know, but there’s one that suggests that, this time, things really are different, that the lessons of past markets may not apply, and that, perhaps, all bets are off.  You have no idea how reluctant I am to say this, not because of any bias against “foreign investors”, but because the idea that “this time it’s different” has always been the rallying cry that marches markets off a cliff.  This time, I’m not so sure.

First, the points you may already have known or at least suspected:

  • more than half of China’s investment is going to California, Washington and New York, and my guess is that much of that investment is concentrated in a few select regions and even cities
  • housing in the leading cities of China is expensive compared even to coastal California real estate
  • “successful business people feel threatened by arbitrary government behavior and have an incentive to get their money out of the country”
  • “many foreigners aspire to send their children to an American college”
  • most Chinese buyers pay with cash

But what’s really the X factor is that, as Green says, “there is no Chinese version of IRS data that tell us how deep this well of investors might be.  If it turns out that there are only 100,000 Chinese able to invest in American real estate, then the end of this cash influx will come to an end soon.  If there are 15 million, then this could go on for a long time.”

Here’s another question Green doesn’t raise but I will:  does the slowdown in the Chinese economy mean a slowdown in investment in American real estate, or does it mean that affluent Chinese will be even more intent on taking money out of China and putting it to work here?

copyright © John Fyten 2014



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