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Real Estate

The ‘China factor’ in American real estate

From Sydney to London, from luxury Manhattan condos to palatial Los Angeles mansions, the ubiquitous Chinese buyers have made their mark pushing the envelope on rising housing prices throughout cosmopolitan cities of the West. San Francisco is certainly no stranger to this global phenomenon; being a primary gateway of Chinese immigration into the United States, it has continuously ranked as the most-preferred housing market for Chinese buyers.

However, San Francisco is hardly the only market. This year Chinese buyers overtook Canadians as the single largest source of foreign home buyers, and they are buying significantly more expensive properties than other foreigners. The average median price purchased by Chinese buyers was $831,000 this year; Canadians ranked a distant second at $380,000.

This phenomenon has fueled enthusiasm on the part of home owners and entrepreneurs who are eager to ride this wave, while also causing consternation among locals about yet another factor feeding growing housing unaffordability. This ongoing wave of investment inflow has sparked debates about the sustainability of this trend, as well as bringing about bearish comparisons with Japan during the 1980s, where a flood of cash-rich investments turned to a trickle as Japan fell unto its two “lost decades” of flat economic growth from which it has yet to recover. Will the seemingly endless supply of cash-rich Chinese buyers be just another trend, or will this be a fixture in American real estate?

The fundamental forces compelling Chinese investment overseas are deep, wide ranging, and also unlikely to change significantly in the near future.

CHINA’S ONGOING INDUSTRIALIZATION

China is a sleeping giant. Let her sleep, for when she wakes, she will shake the world.

—Napoleon Bonaparte

The greatest story of our age is proving to be the rise of China as a modern industrial nation and economy. Emerging from the darkness of the Cultural Revolution in the late 1970s, China now boasts the world’s second-largest GDP in nominal terms (and the largest by other measurements), the largest foreign exchange reserves, and ranks as the world’s greatest trading nation.

China’s industrialization will undoubtedly continue as the country’s development potential is still far from being fully realized. China’s urbanization rate is only slightly above 50 percent, and the next few decades will likely see this figure continue to rise significantly. This means that a sizable portion of China’s population continues to live in its vast rural interior and are not yet fully plugged into the global economy.

China’s current relative slowdown is a symptom of the government’s efforts to transition the nation away from the investment-led growth that propelled China into becoming the “factory of the world” to a consumer-led model more in line with developed economies; this will help fuel the rise of the service sector and the increasing enlargement of China’s middle class. So China’s ranks of wealthy and moderately wealthy will likely continue to grow. Just this year, China officially overtook the United States in the number of billionaires, with 596 versus America’s 536, and the takeover was not gradual; China added a whopping 242 billionaires in just the last year alone.

The source of affluent buyers coming from China is not only unlikely to cease, but their aggregate numbers and the relative size of their personal wealth is likely to increase significantly in the years to come.

SEEKING STABILITY AND SAFETY

Despite all of its successes, China still suffers from significant problems that serve as major catalysts for many Chinese buyers seeking foreign properties. Many of these problems — pollution, vast wealth disparities, and poor safety standards — are ongoing byproducts of its rapid and often unregulated industrialization as well as expected challenges facing the management of a massive population. These issues will likely take decades to solve, therefore Chinese buyers will continue to seek Western countries as lucrative destinations that offer many perks such as clean natural environments, uncontaminated food and water, and relatively cheap and sizable living spaces located in attractive neighborhoods.

Even as China’s economy has modernized, its political system remains authoritarian by nature, with power concentrated in the hands of the Communist Party and its leaders. Though China’s leaders love to preach about the establishment of the rule of law, the reality is that China’s political system is still very much “ruled by man.” China’s wealthy and powerful exist in an atmosphere of precarious anxiety and insecurity, fearing that at any time they may fall victim to the latest political fallout if they find themselves on the losing side. This nerve-racking reality translates into the West being seen as a safe haven for wealthy Chinese to park their considerable riches, some of which may have been questionably earned, and to possess an exit ticket in case political winds blow south.

The rise of the wealthy Chinese buyer currently transforming the global economy rests on many strong underlying currents ranging from the increasing ranks of wealthy individuals resulting from China’s ongoing development, the continued desirability of the Western lifestyle, and an ongoing sense of insecurity with China’s authoritarian political climate. These factors are unlikely to significantly change over the course of the next two decades, thus it is equally unlikely that the flow of Chinese investment into American and other Western real estate will decrease or come to an abrupt halt. Currently, Chinese investment flows into North America have primarily been heavily concentrated in several key metro regions such as Vancouver, New York City, San Francisco, and Los Angeles. However, as the number and sophistication of Chinese buyers continue to grow, investment into less traditional regions and real estate property types will likely expand and diversify.

The impact of Chinese investment in American real estate poses both challenges and opportunities for American consumers and governments. While the presence of strong foreign demand may contribute to a significant drop of affordability in already high-priced markets such as San Francisco, large investment inflows also present great opportunities for American businesses and governments to prosper and ignite greater economic growth. Either way, the presence of the China factor in local real estate markets throughout America is looking like a reality that will be here to stay.

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Frederick Kuo is a San Francisco-based real estate broker, consultant, and blogger. He can be reached at frederickkuo.com.

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