U. S. Housing Boom With Chinese Characteristics

by Dave Schuler on July 12, 2014

There’s a fascinating post over at ZeroHedge on how a lot of housing recovery here has been a result of Chinese oligarchs looking for somewhere to stash the money they’ve looted from the Chinese people:

This means that far from indicating a recovery, as the recent surge in the high end of the US housing segment had long been touted, all the relentless move higher in ultraluxury properties prices was simply a recycling of China’s hot money, which unlike in the US, never made its way into the Chinese stock market (explaining why the Shanghai Composite has barely budged in years) and merely ended up in US real estate. If anything, this is simply another confirmation of the epic capital misallocation, and the complete lack of “trickle down” resulting from failed global central banking policies.

So now that the “who” has been answered, just one question remained: “how?”

How did millions of Chinese “buyers” manage to get tens of billions of yuan or dollars out of the mainland – a country which as is well-known has strict capital controls when it comes to individual and corporate offshore outflows? Under Chinese law, citizens are allowed take only the equivalent of US$50,000 out of the country each year: hardly enough to buy a storage closet in any of New York City’s Central Park West duplexes.

Today we learn the answer and it has to do with officially sanctioned “money laundering” services by not one but two of China’s largest banks: Bank of China and also Citic.

I’m not sure how much credence to place in this. On the one hand, I’ve heard any number of anecdotal claims that most of the houses, particularly expensive house, that are being purchased are being purchased with cash, many by foreign buyers. On the other hand the $92 billion spent by foreign buyers over the period in question is a tiny fraction of the $1.2 trillion in housing purchases over the period.

My hipshot reaction is that this phenomenon is true but it’s a lot more significant to the Chinese than it is to us. That may vary by market. A lot of these purchases are concentrated in a few markets and although purchases by foreigners may be just 7% of the total over the entire U. S. they may comprise a much, much more significant part of the total in specific markets.

{ 5 comments… read them below or add one }

michael reynolds July 12, 2014 at 11:01 am

I remember when it was the Japanese who were going to buy up the whole country. I’m reminded of the line from the poem:

“Will you walk into my parlor?” said the spider to the fly.

Dave Schuler July 12, 2014 at 12:54 pm

I’m not much concerned about the Chinese buying up the whole country. What worries me a lot more is misreading a handful of rich Chinese buying $10 million houses in a handful of markets as a more general recovery of the housing market. That’s the stuff of which bad policies is made.

Guarneri July 12, 2014 at 2:37 pm

zerohedge has been covering this for quite some time. It caused me to pay closer attention to three markets I know well: my home market if you will in Naperville, IL, Naples, FL and Scottsdale, AZ.

As Dave has pointed out, its been an uneven housing recovery, with pockets of significant increase in obvious places like NY metro, So Cal or So FL. But maps have been published showing that the overwhelming (at least as measured by square mile) portion of the country has seen little if any recovery in price.

In those concentrated areas what’s the driver? I haven’t seen much that would make me say the Chinese. But general affluence and the rising stock market has driven things up in Naperville and Naples. But its relatively rarified territory: $1MM – $10MM homes. In Naples you also of course have demographics, and on the foreign side its very visible that Germans are big buyers. Not sure why.

As “cash buyer” is often thought of as a surrogate for speculators/investors you also have institutions. But they have purchased a lot of rental properties. You don’t know who constitutes those funds.

Maybe Michael knows something about the Chinese and the west coast. The bottom line is that I see no way to make the case that the stated housing recovery is based upon broad based demand and buying power. Its concentrated geographically and by income/wealth strata.

Of course we could raise the minimum wage. Then everything would be fixed.

jan July 12, 2014 at 4:36 pm

In southern CA and the north coast above SF a good many properties are being sold for all cash. Such sales are usually on the high end of the market, and so competitive that it only makes that end even go higher in over-bids! I see it, though, as a selective kind of market, not representing any overall stability, or in fact, sustainability of prices that seem devoid of any rationale.

... July 12, 2014 at 6:43 pm

Lots of cash sales in Orlando. Lots of investors buying up asmuch as they can in the middle to upper markets. Based on the people I know who have tried buying in the last couple of years, it is hard for someone looking to buy a house with a mortgage.

Which is to say, like certain periods in Chinese history, fewer and fewer people own more and more of the land.

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