A bunch of stories today show that the capital flight out of China and into Western real estate is not a localised phenomenon, nor are the risks associated with it.
Cheryl Coyne shouted “No more homes for millionaires!” with protesters dressed as pirates outside London City Hall this week. Inside, Mayor Boris Johnson was approving a plan by Hong Kong’s Hutchison Whampoa Ltd. (13) to build as many as 3,500 homes close to where she lives.
“These are the kind of homes that local people will never be able to afford,” said Coyne, a 63-year-old semi-retired schoolteacher who wore a striped shirt and a skull and crossbones neck scarf. “There are thousands of people in the borough who need homes, and instead they’re building flats for multimillionaires.”
The U.K. capital’s status as a magnet for wealthy foreign home buyers is helping to drive prices in many areas beyond the reach of most Londoners. That’s putting pressure on politicians and developers to convince locals that they haven’t been forgotten in the rush to court overseas investors.
Foreign-born buyers made 69 percent of central London new-home purchases in the two years through June, with 28 percent living outside the U.K., broker Knight Frank LLP said in October. Average London house prices increased 18 percent in the first quarter from a year earlier, the most since 2003, Nationwide Building Society said on April 2.
“There is a head of steam building where people are seeing this situation, which is so blatantly unfair, and want firm action to be taken,” Darren Johnson, chairman of the London Assembly’s housing committee, said by phone. Speculation “does nothing for London whatsoever other than push prices up even further.”
…Londoners complain that much of the new development in the city includes apartments that only foreign investors can afford. Luxury-home developers, which often sell 30 percent of apartments abroad to finance construction, plan to build more than 20,000 properties in the capital with a value of about 50 billion pounds in the next decade, Mark Farmer, head of residential property at EC Harris, said in a November report.
The U.K. government has taken steps to increase the tax burden for luxury homes and properties owned by foreign buyers through companies. The Treasury has to be “vigilant” as prices rise, Chancellor George Osborne said today.
Even with those measures, developers will focus on building skyscrapers packed with apartments for investors because the U.K.’s housing polices favor them, Danny Dorling, author of “All That is Solid: The Great Housing Disaster,” said in an interview.
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We’ve already seen similar dynamics close Canada’s wealthy investment visa scheme as crowding out and distorted supply responses have worried authorities there.
In the US it’s a similar emerging story, though less emotive given the housing market remains far below its peaks:
Wealthy Chinese with a few million yuan to burn will spend billions on U.S. real estate in the years ahead, according to a report released Wednesday by CB Richard Ellis, a large global real estate firm.
The United States is the country of choice for China buyers. Canada and Australia come in next at No. 2 and No. 3 respectively. That rich Chinese individuals and savvy corporations are buying up real estate in world class cities is no surprise at this point.
News of new Chinese real estate deals are popping up every quarter. Similar moves happened with the Japanese back in the 1980s. Now it’s China’s turn. And by most estimates, they are snatching up high end real estate in Los Angeles, San Francisco and New York, in particular. In California, China is the third largest foreign buyer of real estate, following Mexico and people from the Philippines, according to Realtor.org.
Zillow Inc. (Z) agreed to make its U.S. property listings available to Chinese consumers through a partnership with a Beijing-based website.
E-House Holdings Ltd.’s Leju real estate site will carry Zillow listings that include homes for sale by agent and owner, units in projects under construction and foreclosures and short-sale properties, Seattle-based Zillow said today in a statement.
Chinese buyers spent more than $11 billion on U.S. real estate last year, with an average $425,000 purchase, Zillow said. The Leju-Zillow site, to be operated by the U.S. company, will be ready around midyear, according to the statement.
“Brokers and agents with listings on Zillow are now able to reach Chinese home shoppers who are ready to invest in the U.S. market, with no additional cost or effort,” Errol Samuelson, Zillow’s chief industry development officer, said in the statement.
It took just one 15-minute phone call in July to persuade Ifei Chang to join Shanghai-based developer Greenland Holding Group Co. and lead a U.S. expansion. Within three months, she was running $6 billion of projects as part of a record push by Chinese investors into American property.
Greenland reached a preliminary agreement in October to buy a 70 percent stake in the $5 billion Atlantic Yards development in Brooklyn, New York. That followed a July deal to acquire a $1 billion residential-and-entertainment project in downtown Los Angeles. Chang, who took charge of that site upon arriving in the U.S., is now on the hunt for more investments.
“In China, you climb a ladder where everything is floating and moving so fast,” Chang, 49, said in an interview at her sparsely furnished 46th-floor L.A. office overlooking the empty lot where the Metropolis project will be built. “We come from a country of 1.4 billion people and a lot of economic growth. This kind of project and investment speed is very normal in China. That’s why we are so confident we will deliver this project.”
Greenland, like other Chinese companies, is committing to a growing number of multibillion-dollar developments outside of its home market. Chinese investments in U.S. commercial properties jumped almost 10-fold last year from 2012, with Manhattan the biggest area for purchases, followed by other New York City boroughs and Los Angeles, according to research firm Real Capital Analytics Inc.
It’s a deeply ironic situation. China’s excess savings, driven by macroeconomic settings designed to build its industrial base, have hollowed out the the comparable capacity of Western nations. In response those nations have financialised, allowing them to intermediate the excess Chinese savings, often into their own mortgage markets.
Before the GFC that intermediation came in the form of Chinese capital flooding bond markets and allowing banks to stretch the traditional limits of external borrowing of nations. Once that avenue blew up via the failed mediation of overly greedy banks, Chinese capital flows have moved directly into the underlying assets via direct purchases.
In theory that aught to be a more secure path of investment. But there are still risks, perhaps just as many:
Western asset prices are re-entering bubbles, sucking in locals, even as hollowing out goes on;
local activism rises with pricing out and distorted supply responses risk long term market mismatches and oversupply;
when the Chinese home bubble bursts, as it will, some portion of the Chinese investment, perhaps a large amount, will be forced to repatriate as a credit crunch transpires at home. Western assets will be dumped, although falling currencies should offer some protection.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
