Over the past two years, Staten Island home sales have been robust, but there may be a hole in this market's silver lining.
The capital flowing in from international buyers, mainly from China, has inflated prices in New York’s outer boroughs has found its way here. The additional investment is putting significant pressure on the demand curve, hence prices are on the rise. Costs of real estate in New York have raised exponentially into double digit territory each of the last two years. The fundamentals, however, are askew, and while it may be turning up a rose for homeowners, changes may be on the horizon. There are two very important fundamental factors in real estate economics that are often glossed over by just saying it is hot or not.
Factor one: wage growth of regional economy support cost, or growth of real estate prices. If a local economy is not growing wages at the same time as the rise real estate prices, you are getting speculative growth. That is simply growth by artificial means, and while it is not on the scale of the great recession, it is a yellow flag at a minimum. Growth in the value of real estate on the most fundamental scale is associated with the localized economy being the primary factor in the health and stability of any market. If you look at cities that have experienced growth, such as in Seattle and San Francisco, or in other business-friendly cities like Austin, Texas, there are ties to foreign investments. It has been fueled largely by Tech companies inviting robust wage growth as primary factors in property value increases, making growth a sustainable. While I will speculate myself here, I do not see wage growth factors as being strong enough locally to establish a better long-term factor in home prices rising.
Factor two: Chinese fiscal regulators are decreasing capital outflows of cash outside of mainland China. Meaning that Chinese Nationals seeking to bring money here for investment purposes, especially in real estate, may lose the ability to fund these purchases, at least like they were. It is difficult to obtain information on how much foreign currency outflows make up New York’s real estate economy. In the most recent development, the Chinese government is limiting funds to Chinese Nationals seeking to use their money outside mainland China. Information about how much is sketchy as Chinese government's fiscal policies are not something made public, but according to recent reports, it is happening. It is something to see what type of adjustments are made, but absent of other fundamentals it can have some real impacts on the real estate market, depending on the scope and scale of the regulation.
Chinese investment in the United States real estate market was negligible until 2010. Since then, it has grown to a point where China trails only Canada and Singapore in United States real estate acquisition; it is tied with Norway for third place.
Chinese real estate endeavors are broad based with investors purchasing residential, commercial, and development property and New York City was the epicenter. There is also a significant and increasing market developing in mortgage-backed securities and real estate loans.
For example, a Chinese insurance firm in 2015 bought the historic Waldorf Astoria hotel in New York City and struck a $6.5 billion deal for Strategic Hotels & Resorts in early 2016. China overtook Canada as the biggest foreign buyer of US homes. Chinese investors are increasing their stakes in real estate investment trusts and private equity funds. In addition, Chinese investors are the biggest holders of mortgage-backed securities issued by US government-sponsored enterprises, such as Fannie Mae and Freddie Mac.
These types of investments are important contributions to the United States economic growth. China was an important source of capital for the United States economy recovered from the recent financial crisis and Great Recession. Furthermore, it is safe money, coming without the politically problematic and sensitive national security issues that investment in the United States technology and telecommunications carriers.
However, there are some problems over the short term with the continuation of Chinese real estate investment at its current or increasing levels. China’s has experienced economic turbulence recently. There is a near-term, 6 to 24-month period of increased capital control expected on the part of the Chinese government. This is due in significant part to Chinese currency valuation problems.
The Chinese feel that they need a base in the United States for themselves; for political and economic reasons and to facilitate the education of their children in America. United States immigration policies favor investors, including real estate investors, though its EB-5 investor visa. This visa increases the opportunity to gain citizenship down the road.
Despite all this positive economic news, there are significant downsides. For example, the Chinese investment is reshaping the United States real estate market in ways that are detrimental to Americans who are trying to purchase their first home. Chinese buyers are bidding up prices in many markets and further increasing an already high demand. This produces another obstacle to many Americans trying to achieve the “American dream.”
But at the core; It is something to see what type of adjustments Chinese financial regulators make on limiting capital outflows. However, absent of other fundamentals, it can have some real impacts on our real estate market, depending on the scope and scale of the regulations. A rather tumultuous start to the Trump administration, a trade war may prove even further regulation from the Chinese government.
To all that are currently looking at rising prices as something that can continue unabated, this development may come as an unwelcome news to a robust real estate market locally.