China’s Demand For US Housing Is Slowing. What Gives?

Chinese shoppers represent an estimated 15% of foreign buyer home purchases in the US, meaning a slowing Chinese economy directly impacts the demand for domestic housing. This is the second post exploring US international policy implications on housing. Access the first post for background on the key recent developments in Chinese trade.

The Impact Is Concentrated

Interest is still there for US housing.

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Southern California Is Feeling The Impact

•  A sharp decline in sales between $1.0M and $1.3M; and 
•  In the first half of 2018, purchase activity was most concentrated in the $850K-$999K range followed by $700K-$849K. The order flipped by the second half of the year, showing a movement towards lower price points.

Data from Zonda shows the pullback in demand coincides with the substantial slowdown in Southern California contracts in the fourth quarter of ’18 compared to the same period in ’17. With the Chinese New Year behind us, we will keep our focus on buying activity throughout the first quarter of 2019.

What Gives?

The Exchange Rate Worsens

•  Loss of purchasing power. Chinese purchasing power in the US dropped 5.4% based on fluctuations in currency alone (assuming a conversion from the yuan) from January 1, 2018 to December 31. 
•  Compound effect. The weaker yuan hit at a time when the monthly payment in the US rose nearly 10% throughout 2018 as rates moved from sub-4.0% to nearly 5.0% (they have recently reset closer to 4.5%) and home prices grew between 5% and 10% in most major markets.
•  Opportunity cost. Chinese buyers looking to place their money often consider the opportunity cost. What is the perceived value of US real estate compared to Australia, Thailand, and even China? As costs and risks increased in the US, speculative buying slowed, and buyers looked elsewhere in the globe for a higher and safer return.

Capital Controls Heighten

•  Money should not be used for real estate. China has long had restrictions on moving money offshore in an effort to protect the domestic economy. The current quota of $50K per year has been in place for years, but a big change occurred in 2017 with individuals being required to obtain a waiver to verify they were not using the money for real estate outside of China, among a few other restrictions. 
•  Sharing of assets. A workaround from the $50K cap is through a process called smurfing. Smurfing allows family members, friends, and even strangers to move small lumps of money overseas and pool allowances each year. The Chinese government adjusted for this by banning lending allowances to others.
•  No more unlimited accounts. Historically, an individual looking to get cash in the local currency was subject to $15K per year maximum per account. The government realized one individual could end up with many accounts totaling far more than their $15K limit. The new rule says $15K per year per person. 

The literature, guidance, and enforcement of capital controls is vague. An increase in crackdowns suggests the Chinese government has become smarter at recognizing loopholes over the years, which helps explain the shift today. Overall, the data shows some nervousness to invest in the US, but not a complete stop.