China Wants Our Homes

We’ve all seen the label a zillion times: “Made in China.” But are some Americans’ dreams of home ownership now at risk of being un-made in China?

All over California, Chinese buyers, flush with cash, are driving up home prices beyond the ability of American would-be home-owners to pay. West Coast real estate agents say America’s sluggish economy and flat incomes can’t keep pace with the rising inflow of wealthy Chinese buyers of mid-range suburban homes.

“When the [housing] prices are going up so fast, most people’s income does not increase at the pace of the real estate market,” said Ellen Osmundson, a real estate agent in Walnut Creek, on the eastern side of San Francisco Bay, where the Chinese population is growing rapidly.

“People’s income doesn’t increase by 11 percent. We have problems getting the minimum wage to $15 an hour …  how can they afford those [price] increases?” said Osmundson, a Hong Kong-born Chinese-American who has been selling real estate to foreign buyers since 1990.

Americans “have a hard time affording houses already … [and] the Chinese are the ones with the money who can compete in the bidding wars” for suburban houses, she said.

Chinese “people come here saying they want something for $500,000, $800,000 — it’s not the $3-$5 million” buyers who comprised the prior wave, said Chen Ping, a real estate agent in Alhambra, a suburb just east of downtown Los Angeles.

“We’re seeing more of these second-tier investors and buyers” buying houses in suburbia, said Helen Zhang of Tarbell Realtors, 30 miles southeast of downtown Los Angeles. “They are at a lower price-point” than the prior waves of super-rich Chinese, she said.

“Lots of people local, they hated this. They say, ‘They come here with cash, cash, we don’t have cash,’” Zhang said.

This is exactly the sort of development warned against, by the way, by billionaire investor Warren Buffett in a famed 2003 column in Fortune magazine known as his “Thriftville vs. Squanderville” scenario. In his column, Buffett imagined two fictional islands bearing those names, with Thriftville exporting more and Squanderville buying Thriftville’s products on credit. When Thriftville cashed in the Squanderville debt, it was able to buy more and more Squanderville land until it owned the entire Squanderville island.

In effect, Thriftville conquered Squanderville via purchase rather than arms — but the end result was the same.

Is China now playing the role of Thriftville, putting American Squanderville at risk?

The Numbers
Nobody says the foreign-ownership trend has reached critical mass yet — but it’s clearly growing.

On one hand, foreign purchases still comprise only 8 percent of the $1.2 trillion real-estate market in the United States.

On the other hand, that percentage is growing rapidly. Foreign buyers purchased $104 billion of real estate in the United States in the 12 months leading up to March, 2105, according to a June survey by the National Association of Realtors. That’s up from $92.2 billion of real estate in the United States in the 12 months leading to March 2014, which itself was up an astonishing 35 percent from the prior 12 months ending in March 2013.

Half of the foreign purchases were by immigrants, half were completed by foreign buyers.

Chinese purchases have risen even faster than the foreign-purchase average, almost doubling from March 2013 (12.8 billion) to March 2014 ($22 billion) before rising again to $28.6 billion in the year ending in March of 2015.

Chinese buyers’ 27.5-percent share of the foreign buyers market is now more than five times their 2009 share of only 5 percent.

Chinese cash pushed regional house prices up by 23 percent

That’s slightly ahead of sun-seeking Canadians, who comprised 15 percent of the market, mostly in Florida and Arizona. Buyers from India and the United Kingdom each comprised 6 percent of the market. Mexican buyers were 5 percent of the market.

But the Chinese paid higher prices, partly because their buying is concentrated on the pricier West Coast.

Chinese nationals bought 35 percent of their real estate in California in 2014.

China’s buyers are also pushing up prices.

Seven percent of Chinese purchases took place in Washington state, whose most populous city, Seattle, was the basis of a popular Chinese film in 2013, “From Beijing to Seattle.”

China’s buyers are also pushing up prices.

In 2014, the average price of a Chinese purchase was $523,148, or almost twice the $275,000 they paid per property in 2009.

In California, the average price of a Chinese house purchase rose from $447,000 by early 2014 to $490,000 by early 2015, according to the California Association of Realtors. That’s an 11-percent increase in one year.

The infusion of Chinese cash pushed regional house prices up by 23 percent in the year up to March 2014, and by another 5 percent in the year up to May 2015.

In the suburbs near San Francisco, prices have climbed up to 15 percent since January, said Osmundson. Chinese “investment is spreading all over different prices ranges,” she said.

Roughly 15 percent of residential sales in the San Francisco region are to foreign buyers, and half of those are Chinese. Within the region, Chinese buyers take roughly 25 percent of purchases in the super-expensive Silicon Valley suburb of Palo Alto.

Chinese companies also are building large housing complexes in Los Angeles and in Anaheim, a suburb south of LA’s downtown. Another Chinese company is building a complex with 656 luxury condos in downtown San Francisco.

The increase in the number of Chinese buyers has drawn national media attention and pushback from some business publications.

But it has not attracted the opposition sparked when a government-backed Chinese oil company tried to buy Unocal Oil in 2005. The Chinese corporation dropped its $18.5-billion bid after American lawmakers said any sale could compromise U.S. foreign policy.

Why Are They Buying?
Many of the Chinese buyers are buying houses for use by their children who are enrolled in American two-year and four-year colleges, and often working via student work-visas. Suburban houses are selling for $500,000, a “very modest price range” for that market, Osmundson said.

Many other buyers are buying houses after purchasing EB-5 family visas from the federal government.

Others are buying houses, even though they’re still only tourists who can’t legally settle in the country. Tourists can buy houses, “as long as they play by the rules,” said Osmundson.

However, tourist visas are only for temporary stays, not residency.

Fifty-six percent of Chinese nationals said they intended to use their property as a second-home or vacation rental.

Some residential buyers want to buy a house just in case they decide to emigrate from China if there’s a crisis, said Yong. “They have some savings and they want to own a piece of property in the United States for safety purposes,” he said.

Others are buying now in the expectation they’ll migrate to the United States, Zhang said. “They buy property here, and leave it for investment until their kids grow up,” when they’ll move to raise families, she said.

However, the house-buying frenzy is hindered by China’s rules, which bar the export of more than $50,000 per person from China.

Still, “they have different ways to move the money,” said Zhang. “Sometimes the clients will ask a bunch of friends to wire the money to different” accounts outside China, she said.

“You have lots of way to transfer money,” said Ping.

Some buyers also are ignoring U.S. laws, which require owners to pay higher property taxes when they rent out residential property.

In the suburbs near San Francisco, prices have climbed up to 15 percent since January

In the pricey Woodland Hills neighborhood north of LA, Stacey B.’s neighbors sold a house to an Asian couple who said they planned to live in the hilltop community. Instead, they quickly put the house up for rent.

“What they said was that they wanted to move in, but the mother[-in-law] is really ill, so maybe they wouldn’t be able to move there right away, but they said nothing about renting out,” Stacey told Lifezette.

Nonetheless, the local government won’t intervene, said Stacey’s husband. “Hell no,” he predicted.

Chinese buyers tend to reduce ordinary consumption to accumulate property, instead of following the American practice of selling each house to buy a better house,  Osmundson said.

“Chinese people, they buy, they hold, you hardly see them sell — that’s another thing about the shortage of supply.”

That buy-and-hold practice exists because most Chinese see property as a refuge against instability, she said. “Land means wealth … [so] the family won’t have shortages of food and building materials,” she said.

Like many older Americans, many Chinese people hide their housing wealth behind a facade of ordinary jobs, cars and clothes, Osmundson said. In the San Francisco area, “a lot of these [Chinese] people own a few properties free and clear,” she said.

For example, Osmundson said, she met a Chinese janitor at the Los Angeles airport who “had saved up enough money over the years to have owned three or four properties safe, free and clear.”

The janitor is “renting them out to different tenants, she’s very wealthy [and] pretty much sums up the Chinese people’s love for land,” Osmundson said.

But that buy-and-hold practice means fewer houses are available for Americans to buy, including houses out in suburbia, Osmundson warned. “Chinese people, they buy, they hold, you hardly see them sell — that’s another thing about the shortage of supply.”

And when supplies drop, prices rise. “The prices are governed by supply and demand,” she said. “It is Economics 101.”