China’s latest invasion of America has been weakening recently. No, it’s not nuclear, nor does it involve Communist spies; these crazy rich Asians have been purchasing U.S. homes and flooding the market just until last year. An examination of the big money industry of real estate will reveal much about Chinese home buying is changing political and economic climate in 2019.
How the reasons have changed
While Beijing and Shanghai hold some of the highest real estate prices in the world, the Chinese upper class splurges money on American homes instead. Driven by a variety of factors, the Chinese home buying boom hit its peak in 2017, with the U.S. National Association of Realtors putting an estimate at about 31.7 billion dollars. The reason for the surge? Chinese home buyers and foreign investors viewed American homes as a lucrative investment. Lenient tax laws and a desire to leave the mainland for political reasons have also contributed, with American mortgage rates dropping drastically to meet the demand. The rise in demand, supplemented by students studying in America and immigrating workers, has since dropped sharply.
Following the “Trump Effect”, Sino-U.S. trade war, and increased Chinese controls on cash outflow and property purchasing, Chinese investors’ confidence in the security of American homes has waned; a home that may have been a secure exit in case Chinese politics goes downhill has now become a questionable investment. Other factors, such as environmental quality, food safety, and education have not wavered, so the Chinese investment of $13.4 billion in 2019 still stands strong. However, the number of homes bought by all foreign buyers has declined sharply, from $153 billion in 2017, to $78 billion in 2019, as other countries follow China’s lead and often purchase American residences for similar reasons. It makes sense, despite the market’s confidence in itself, that rising political tensions would hurt sales targeted at people seeking political stability.
Investment Implications
As American real estate’s primary customer flees the market, serious implications arise. The 36% overall drop in home sales may sound awful, but is actually the opposite: the stress on the real estate market from the past few years is being relieved. Because American inventory of homes has shrunk due to the rapid selling to Chinese buyers, the lowered home buying rates will help prevent the market from becoming over-inflated in the long term. Despite this, urbanized areas with limited space have been hit hard, with the NAR asserting that big cities, “in some cases, [have felt an] oversupply of high-end units, longer times to close a deal, and potentially even price drops.” With mortgage rates and home sales falling, domestic worries over the strength of the American market have arisen. As concerns over U.S. visas increase and the USD strengthens in comparison to the CNY, Chinese home buyers are expected to shift into other major markets outside of the U.S. Alternative destination foreign home buying (i.e. Australia, Canada, the U.K., and Japan) has thus gone up.
It should still be noted, however, that home buying is a flow, not a stock. While the flow to American homes has significantly decreased, China remains the largest country of origin for foreign buyers; Chinese home buyers may get cold feet but still see owning American property as a requirement for political and economic stability. The uncertainty in the Chinese market forces Chinese home buyers in particular to seek American residences, while other foreigners may not feel such pressure to do so.
The resilience of Chinese investment in American property reinforces a statement from Chinese real estate portal Juwai’s CEO Carrie Law: “It turns out that Chinese demand for US real estate cannot be killed — not by the trade war, not by the Trump Effect, not by visa restrictions, and not by capital controls.” What Law refers to--the Trump Effect--is the conflation of tariffs, visible anti-Chinese stances, and tougher lines on immigration pushed by Trump. The Trump Effect harms foreign confidence in American market stability and safety, leading to a self-fulfilling prophecy as the trade war hurts the real estate market. Travel warnings for the two countries further this, perpetuating negative discourse about the security of the other country and damaging trade relations. With Chinese home buyers cognizant of this deterioration of trust under the Trump administration, fewer people are as eager to purchase American homes. Thus, the flow of Chinese home buyers slows just slightly, the significance being that foreign influence on the American housing market will not end, despite the Trump Effect.
Although the trade war and capital controls have also led to the sharp drop in foreign real estate sales, the continued, albeit diminished, strength of the Chinese influence on the American market, or at least the real estate market, tells us one thing--the U.S. depends on China. As no other group rises to meet the gap left by house-hungry Chinese buyers, it is clear that there are no alternative customers; this is not inherently concerning, though. Chinese tourism and real estate investment will remain strong, so long as America is the world’s most developed state. Wealthy foreign parents will continue to send their children to study at prestigious American universities, and the housing market will rebound as the trade war continues and becomes the norm. Evidenced by the $13.4 billion investment from China alone, Chinese interest in American markets on the whole will not die out. America will continue to depend on China’s patronage, even as visa restrictions hurt trade relations. There is a deep connection between the two countries, regardless of whether they like it or not.