Feb 14, 2019

Housing Policy

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.

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The real estate average purchase price by non-Americans is nearly 60% more expensive than that purchased by Americans ($454,000 vs $290,600), according to the National Association of Realtors (NAR). However, the average purchase price in 2018 of $454,000 is 15% lower than the prior year ($535,000). A downward trend can also be found when we isolate spend by Chinese investors specifically. Our Director Of Economic Research, Ali Wolf, dug into the data and highlights a shifting trend.

15%

Foreign Homebuyers
Are Chinese Shoppers

The Impact Is Concentrated

The pullback was not universally felt across the US. In fact, the same NAR report indicated that over half of total residential purchases by foreign buyers occurred in five states*, with a third of all sales in just two: Florida and California. Singling out Chinese demand, there are a couple of noteworthy trends.

Interest is still there for US housing.

Juwai is an online brokerage firm connecting Chinese buyers to real estate across the globe. The US remains the number one most searched country, but fourth quarter trends show strong interest in Asia and Europe. Inquiries to buy property in Thailand, Greece, Germany, and Spain all increased by 100%+ in the fourth quarter compared to the same period last year, while interest for the US grew only 8% YOY, with October being the weakest month of the year.

Trending favorites.

Within the US, the top cities searched by Chinese shoppers on Juwai were: Los Angeles, New York, Seattle, Houston, and Orlando.


Southern California Is Feeling The Impact

Our Principal of Advisory, Mollie Carmichael, analyzed California total home sales over the past two years and saw an extraordinary shift. Looking at Central Orange County as an example, we broke out the sales activity by ethnicity, life stage, and typical price ranges. We discovered several trends with the Asian buyer.
  •  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.

A considerable pullback in home closings in 2018 compared to 2017 across most price points.

Mollie Carmichael, Principal

What Gives?

The slowing Chinese economy, faltering confidence, and political instability combine with other financial challenges to impact demand.  

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. 

 *Florida, California, Texas, New York, and Arizona

Conveying value and investment safety are two keys to keeping foreign buyers interested in US real estate.

Ali Wolf, Director, Economic Research

Contact us to discuss how we can help you position your product to be successful for a wide range of buyer types.

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We cover topics around housing, policy, markets, and technology.

Ali Wolf

Director, Economic Research

Ali Wolf

Director, Economic Research


Mollie Carmichael

Principal

Mollie Carmichael

Principal


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