There has been much speculation that mainland Chinese homebuyers will pull back their California property purchases amid China’s economic slowdown as the country’s escalating trade war with the U.S. dampens growth. These concerns were fueled by reports from Beijing recently that China’s economic growth slowed to its weakest pace since the first quarter of 2009 with the economy growing at 6.5% year-over-year in the ’18 third quarter, missing expectations for 6.6% growth.
California home sellers take heart! As it stands now, the facts on the ground do not support recent forecasts of a Chinese pullback from the California real estate market.
On the contrary – – At present, Chinese consumers still have ample means and appetite for California real estate.
While data has shown that in recent years the Chinese economy, on paper, is slowing from previous levels, the Chinese government has been unable to detect and stop the flow of illicit money out of mainland China. Simply put, Beijing’s capital outflow controls have been ineffective in stemming the international transfer of underground money, a phenomenon that continues at a rapid clip.
In recent years money flows originating from illegal sources in China has been on the rise. In the first quarter of 2017, for example, US$58 billion of capital outflows from China came from illegal sources, demonstrating the difficulty of identifying and measuring the flows.
In some respects, this should not be much of a surprise. Due to the needs of corporations to maintain cash flow and liquidity, company executives devise ways to facilitate the illegal and undetected flow of money. This can come in the form of direct investments, sometimes as current account transactions and at other times it is the flow of plain old-fashioned underground money.
Chinese regulators continue to be outwitted and overwhelmed by consumer demand originating from their soil. Undeterred by authorities, mainland families and individuals eager to buy their piece of the California rock continue their efforts unabated.
This momentum of Chinese home buying in California has continued notwithstanding predictions that stricter policies out of Beijing and growing uncertainty surrounding U.S. immigration and trade policy would lead to a slowdown in foreign investment.
Another reason local sellers of homes will continue to find Chinese buyers is ongoing demand. The fact of the matter is that Chinese property hunters find California housing an attractive prospect.
In a 2018 study by the National Association of Realtors, California amounted to 14% of all foreign purchases of residences in the U.S., up from 12% in 2017. This likely indicates a growing confidence on the part of foreigners in California real estate.
Of the foreign purchasers of U.S. real estate, buyers from mainland China, Hong Kong, and Taiwan topped the list of overseas buyers. The study found that Chinese home buyers elected to buy in California 38% of the time, a 1% increase from the prior year.
According to Jonathan Lansner of the Orange County Register, non-U.S. citizens bought approximately 41,500 homes in the Golden State in the 12 months ending in March, 2018, marking a 9% increase over the past year. Of those purchases, China-based buyers accounted for 17,000 of these transactions, a rise of 3% from the previous 12 months.
Some other numbers to consider …
- The biggest consumers of U.S. properties in 2017 were from China, accounting for $31.7 billion worth of property, an increase of over $4 billion from 2016.
- Non-U.S. citizens bought $35 billion worth of California properties in 2017, an increase of $8 billion from 2016.
- Last year property buyers from the Asia Pacific accounted for 71% of foreign buyers in the Golden State. This was a 20% increase from just a year earlier.
Taking into account larger trends in the global economy, Asia has been the fastest growing market for wealth management since 2013, consisting of 45% of global inflows from 2013-2018. Asia-based asset managers reported US$66 billion in revenue in 2017 and this trajectory is expected to double by 2023, according to McKinsey. Currently, China alone represents 37% of assets under management in Asia, and analysts are forecasting that China-affiliated assets will grow at a per annum rate of 17% over the coming five years.
Yes, a clampdown by regulators in Beijing is in effect. Nonetheless, it’s end result has been ineffectual due to both the undetected flow of money to the U.S. and continued Chinese demand for California properties. For the time being, Chinese homebuying in our state will continue in spite of China’s government-mandated restrictions and other factors, i.e., the current U.S. real estate market slowdown, rising interest rates, and the U.S.-China trade war.
This post was written by Yumiko Blaschko. Yumiko is Senior Associate of the McMonigle Group in Corona Del Mar, California.