The recent crash of the Chinese stock market will likely show some effect on the U.S. real estate market, as Chinese investors look internationally for safe harbors to store their wealth.
About 50% of Chinese investors surveyed are considering a purchase of U.S. real estate, according to East-West Property Advisors, a corporation connecting Chinese buyers with U.S. real estate professionals.
Foreign investments in California properties
California has received considerable interest from Chinese investors in recent years, particularly in larger metropolitan areas. 34% of Chinese buyers looking for U.S. real estate were interested in purchasing property in San Francisco, followed by 17% interested in Los Angeles property and 13% interested in San Diego property, according to a survey by East-West Property Advisors.
International investors paid on average $490,000 per transaction in 2014, according to the California Association of Realtors’ International Buyers Survey. Of these investors, 66% paid in cash for their houses.
Chinese buyers’ preference for cash payments and newer, single family residences (SFRs) may sound ideal to agents, especially since 36% of foreign investors in California real estate in 2014 were Chinese, according to the International Buyers Survey. However, anticipating a massive influx of Chinese buyers generated by their stock market crash is unrealistic.
The Chinese stock market represents a considerably smaller portion of China’s economy than the U.S. market represents of its own – roughly 3% of China’s gross domestic product (GDP). Chinese citizens who invested in the stock market are wealthy, and thus their loss of value in stocks does little to alter China’s economy. Further, their stock market is unrelated to the fundamentals of their economy, a true casino selling positions to others, if they can find buyers other than China’s government.
The extensive number of citizens who didn’t have money in their stock market are the ones who may seek investments in American assets, like real estate. This may briefly support prices in California real estate, but the false inflation will be short-lived – once the Chinese and global economy recover, investors will be free to move their “hot money” elsewhere, and they will.
Will the stock market crash delay the Fed’s rate hike?
A more hotly debated topic is how the Chinese stock market crash will indirectly affect domestic home sales, by way of interest rates. Steady increases in foreign investments indicate instability in international markets. Thus, some worry that the Chinese stock market crash and resulting economic challenges will jar the global economy. In turn, the China stock market crash gives the Fed the opportunity to consider a delay in their interest rate hike until global markets stabilize.
All this Fed calculus adds to Wall Street’s consternation over its long-demanded rentier push for the Fed to move off the status quo. The Fed does not much listen to Wall Street talk or the media that represents them.
Thus, these concerns are unfounded. The Fed’s interest rate hike is dependent on inflation, wages and employment. As far as a Fed rate hike goes, the Fed’s engine is primed – core inflation is near the 2% goal, and employment (though not wage growth) is also on target. The Fed will move, but only when the indicators tell them it is time to control the flow of money.
But as this article indicates, the short-term Fed rate isn’t where China’s economic struggles will manifest in the California (and the U.S.) mortgage market.
Instead, China’s economic turmoil – and that of other countries, like Greece and Brazil – will reflect in 10-year Treasury Note (T-Note) rates. Under stable economic circumstances, investment in 10-year T-Notes declines when the Fed raises interest rates, since T-Note rates tend to rise proportionally due to perceived consumer inflation. However, the instability of the world’s markets and the stable inflation outlook is likely to cause foreign investors to retain 10-year T-Note investments long past when they usually seek investment opportunities elsewhere. 10-year T-Note rates are likely to remain low while foreign investors consider them the best investment opportunity.
In parallel investment mentality, California will witness continuing inflated property prices, but only so long as foreign investors (and U.S. speculators vested in real estate) consider U.S. assets their best deal. When the global market recovers – likely around the time Generation Y begins buying first homes in earnest and Baby Boomers begin moving out, finally able to retire – investors will pull their speculative cash from the U.S. and return to investments elsewhere. If the timing is concurrent, then the real estate market will remain stable.
Re: “What does the Chinese stock market crash mean for US real estate?” from Inman