Is China’s Real Estate Market Crashing…And Does It Impact U.S. Housing?

CBS’s 60 Minutes did this 12 minute segment on China’s ‘ghost cities’ and the potential Chinese real estate bubble awhile back. Its interesting and worth watching:

Watch the video here

In very simple terms, there is more wealth in China these days. And the Chinese are phenomenal savers, and therefore need places to invest.

Initially this was real estate, with up to 75% of Chinese wealth being held in real estate. Chinese love for real estate has bolstered the U.S. market as well, with some estimating that in many major cities they represent up to 1/3 of buyers, often purchasing for cash.

And then the Chinese government encouraged the average Chinese citizen to get involved in the stock market. They opened up the ability to trade on margin (spend a small amount of money to buy a lot of stock). So a lot of that money started to flow into stocks. When people got scared and pulled it back out (or tried to) recently, that helped contribute to the dramatic fall in Chinese stocks that the newspapers have been reporting on. Which impacted the U.S. stock market.

So what does this mean in the U.S.? Maybe the best sound bite of late came from famous billionaire investor, Shark Tank member and Dallas Mavericks basketball team owner Mark Cuban. Here’s what he had to say about the recent turmoil in the U.S. stock market:

“About a month ago I increased my hedges. Meaning I felt like if I can’t look to see and understand how and where people are making money, that means something’s going on, something’s not right. So I dramatically hedged my whole liquid public portfolio…Yeah, so I’ve actually done pretty well with all this volatility and this decline. But my point is I made that choice because it’s so hard for anybody to make money in these markets that they’re almost impossible to understand. And so the trades I’ve made aren’t traditional equities,” he said.

In other words, if a billionaire is guessing, who knows.

If Chinese money stops flowing into the U.S. as some predict, then this would of course have a very negative impact on U.S. real estate. Imagine having 1/3 of the buyers in any market disappear?

But logic makes you ask: where would these Chinese buyers go to, if not the U.S.? If they are pulling their money out of the Chinese stock market, and Chinese real estate is dropping, they need to put it somewhere. And traditionally, the Chinese investor has preferred U.S. real estate.

But here is another perspective. Maybe the Chinese investor won’t have money to invest in real estate once stock losses are considered. Due to heavy stock losses, Chinese investors are rushing to sell their real estate (since stock was purchased on margin, again, very common in China). China Daily, the Communist Party’s official mouthpiece said this in July: “Some investors are rushing to sell their homes or ditching plans to buy property after piling up losses when the Shanghai Composite Index went into free-fall over the past three weeks.”

Are you confused enough yet? We sure are. Is the Chinese real estate market in a free fall? Not yet it seems. But it sure doesn’t look strong at this point. And as the world’s 2nd biggest economy, if it catches a cold, we’ll be catching that same cold here in the U.S. before long. And that cold could, and likely would, impact U.S. real estate in some meaningful ways.

Bottom line? No conclusions. Just keep an eye on China; what goes on there will likely impact real estate here.

SGI Staff

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SGI Staff

Tom

the Chinese are barely 1% of the entire USA real estate purchases. yes there are a couple of cities with super luxury real estate that hit the 20 – 30 % sales to Chinese. but I fact checked and got out the calculator… if all Chinese real estate purchases stopped immediately, it would be a nationwide change of less that 1.5% … would be barely a ripple.

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    Dylan

    You make a fair point. Its really hard to get a read on the impact since fear also plays a role in purchasing decisions. You’ll note in this article from NAR that the majority of foreign real estate purchases is focused in 4 states, so the impact in those markets would be disproportionate. http://www.realtor.org/reports/profile-of-international-home-buying-activity.

    I don’t know anyone who REALLY knows what the impact would be. Usually however you are correct, these things tend to be overblown.

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