Problems in China might be hitting home for you – if you’re in certain parts of the world – in a very personal way: at your front door.
One of the less-noticed ways that China’s explosion in wealth has spread throughout the world economy has been in residential real estate. The housing markets in parts of the U.S., Australia, Canada and Singapore (as well as Hong Kong) may be some of the biggest losers as the Chinese economy slows, and if the government intensifies its crackdown on money leaving the country.
Chinese property broker Juwai.com, lists the U.S., Canada and Australia as the top three foreign countries for Chinese real estate investors. What’s happening in these countries shows the impact that Chinese buyers, along with historically low interest rates, can have on local housing prices.
According to the U.S. National Association of Realtors (NAR), the most common foreign purchasers of real estate in the U.S. are Chinese (in its study, this included people from Hong Kong and Taiwan). They replaced Canadians as the top foreign purchasers of U.S. residential real estate.
For the 12 months ending March 2015, the latest NAR data says Chinese buyers purchased US$28.6 billion worth of U.S. residential property, four times the 2011 level. That was 16 percent of all international transactions, up from 9 percent in 2007. That means Chinese buyers accounted for about 2 percent of all residential real estate transactions in the U.S. during that period.
Most of those purchases were on the West Coast, in places like Los Angeles, San Francisco and Seattle. But, Chinese buying has found its way to every corner of the U.S. Transactions with Chinese buyers are usually easy: about 69 percent of U.S. residential real estate purchases by Chinese buyers were cash deals. That meant waiting for a mortgage approval was not an issue.
Canada is also a major destination of Chinese residential real estate investment. A summer 2015 study by MacDonald Realty, a Canadian real estate brokerage firm, found that 70 percent of Vancouver homes that sold for more than US$2.1 million (CAD$3 million) went to buyers from mainland China.
One result of the buying has been higher prices. The average home price in Vancouver rose 27 percent in 2015. Toronto, also a popular destination for Chinese investment, saw house prices rise 25 percent last year.
According to a Deutsche Bank study, home prices in Toronto and Vancouver are 63 percent overvalued. A study by Demographia, a real estate research firm, found Vancouver is now the second-least affordable housing market in the world, after Hong Kong. (The analysis compared local average incomes with average home prices).
It’s the same for Australia. For the five years ending October 2015, Chinese investment in Australian real estate increased five-fold. About 80 percent of the buying was done in Sydney and Melbourne. Real estate prices in Sydney jumped 44 percent over the three years ending September 2015. Sydney is now the world’s third-least affordable city for real estate, according to the Demographia study.
In Asia, a lot of Chinese money has flowed into Singapore real estate. By some measures, it’s been the second most popular destination in Asia for Chinese real estate investment in recent years, after Hong Kong. Since Hong Kong is a Special Administrative Region of China, it’s the easiest way for Chinese investors to buy real estate “abroad.”
A lot of factors contributed to the strength in real estate prices in the U.S., Canada, Australia and Singapore. The recent extended period of low interest rates and easy access to cash around the world boosted real estate prices in a lot of markets.
But, due in part to Chinese investment in these countries’ real estate markets, they have seen some of the world’s biggest price gains. According to The Economist, Singapore, Canada and Australia have experienced some of the sharpest upward movements in residential real estate over the past 10 years. (The effect on the U.S. isn’t as big because it’s such a large market and the effect of Chinese investment is relatively limited).
Chinese investors have a lot of reasons to buy homes abroad. Many wealthy Chinese want to diversify their risk by investing in a different currency and a different market. That intensified as the renminbi began to depreciate in August and as the Chinese economy weakened.
Also, people with enough money want a place to go if they need to leave China in a hurry – areas where a lot of their countrymen already live are the most attractive. Many people with enough money in China also want to live in a more predictable and environmentally safe country with a good education system.
As China’s economy slows, foreign property markets that have seen prices rise because of Chinese investment may be in trouble. The Chinese government is making it harder to move money out of the country. In recent years, rules against taking money out of China had loopholes big enough to drive a truck through.
Chinese citizens are legally only allowed to move US$50,000 out of China per year – but in reality, this limit is easy to get around. As the renminbi falls, though, the government may make it a lot more difficult for Chinese citizens to take money out of the country – and to buy real estate abroad.
Even without more money controls, the slowdown in the Chinese economy will eventually reduce demand for foreign real estate. It’s already taking a toll in Hong Kong, where property sales last year hit a 25-year low, causing prices to decline sharply.
As the yuan depreciates, Chinese demand for foreign property probably will increase, since the more-wealthy people in China will want to get their money out of the country. But if they are not able to – which is likely to be the case – home prices in a lot of markets around the world will start to feel the effects.