China’s Attempts to Curb Capital Flight Threaten Luxury Real Estate in U.S.

Over the past few years, Chinese buyers have come to dominate the world of foreign real estate investment. China’s tumultuous economy and unstable currency have left many wealthy Chinese looking for a more reliable home for their cash; real estate fits that bill perfectly. Focusing on high-end properties in major cities, these investors have already left a lasting impact on markets.

But at the same time capital has been flowing into many foreign markets, it’s also been draining out of China – a problem the country’s central bank is keenly aware of.

In an attempt to curtail capital flight, the Chinese government is putting increased pressure on individuals looking to buy foreign currency and invest it abroad.

Although it’s too early to gauge the long-term impact of these new policies, many are keeping a close eye on Chinese capital markets because they could be a bellwether of where luxury U.S. real estate is headed in 2017.

Capital Flight Explained

While China’s economy has enjoyed rapid growth in recent years, the country’s central banking institutions have struggled to adjust, flipping back and forth from allowing and throttling free markets in the country. Most of this is due to China’s central bank, under the direction of President Xi Jinping, trying to figure out free-market capitalism on the fly. Recent moves into the international banking community have only heightened struggles for the emergent economy.

Uncertainty surrounding China’s economy and currency has left investors seeking out safer offshore markets to park their wealth. Just last summer, China’s central bank turned on a spigot of lending – a short-term fix to skyrocketing interest rates that had reached close to 70 percent.

Unsurprising to most, much of this credit left the country immediately. In just six months, capital outflows were out of control – totaling an estimated $725 billion in 2016, much of which came in the latter half of the year.

In response, China’s central bank has recommitted to enforcing rules already in place to stem the tide of capital outflows. This includes closing loopholes and increasing scrutiny on individuals purchasing foreign currency. Because this move is so recent, it’s hard to predict its success or impact on capital markets long term.

However, these stricter regulations are certain to impact individual markets that have recently relied on foreign capital – like real estate.

How Chinese Capital Impacts the U.S. Real Estate Market

The torrent of Chinese capital over the past few years has sent shockwaves through real estate markets in major U.S. cities like Los Angeles and New York. Many individual buyers will buy property while on holiday or even sight-unseen, leading to higher prices and fewer homes on the market.

The big money that Chinese investors bring to the table can quickly spike prices in already pricey areas because these are viewed as hot markets. Local buyers are typically the most affected and many have started getting priced out of their own neighborhoods. Some have expressed concern that this influx of wealth could lead to housing bubbles in markets across the country.

Chinese buyers have scooped property in cities from London to Dubai, and the U.S. is no exception. Over the last three years, China has dwarfed all other countries’ foreign real estate investments in the U.S. In 2010, China invested less ($11.2 billion) than the U.K. ($12.1 billion) and Canada ($17.1 billion) in U.S. real estate. Fast-forward to last year – China had invested $27.3 billion, compared to the U.K.’s $5.5 billion and Canada’s $8.9 billion.

While private Chinese companies have scooped up large commercial properties both globally and in the U.S., individual residential property remains the most popular with Chinese buyers. These properties are overwhelmingly high-priced luxury units – Chinese buyers paid on average $831,000 per home in 2015, compared to the average of $499,000 for other foreign buyers.

In 2016, 32 percent of Chinese buyers purchased property in California, 10 percent were in New York, and 39 percent came elsewhere. Those 39 percent of buyers represent a broad distribution across many real estate markets.

But now that China is looking to curtail the outflow of capital, all of this is at risk.

Basic finance and trade in the country are already suffering from new regulations and this is sure to leak into the world of foreign real estate buying, as cash is increasingly difficult to move out of the country.

What to Consider

While China’s $27.3 billion in U.S. real estate investment is only a small fraction of China’s $725 billion outflows in 2016, the Chinese government is specifically monitoring the purchase of property in its new efforts to limit capital flight. This leaves real estate sellers in a dubious position – tempted by big Chinese dollars but wary of cash freezes that could slow or halt deals. Some markets are already feeling the squeeze as deals in process have fallen through due to lack of funds.

But this doesn’t mean all is lost for sellers hoping to cash in on China’s capital boom. Wealthy Chinese investors have historically ignored capital restrictions, which is what led to their stricter enforcement in the first place. There remains little proof that the same investors won’t continue to try to skirt regulations moving forward. Indeed, many have already parked foreign cash abroad and will, therefore, be unaffected by Chinese state currency regulations.

Anyone looking to sell in major markets should consider all of these implications before listing a property. Chinese buyers have bolstered luxury markets across the world, but some cities are already seeing the impact of the country’s new regulations. Now might just be the perfect time to cash out before the lack of Chinese capital leads to falling prices and a buying slump.

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