Chinese Pullback From US Real Estate May Be Permanent

A real estate sign advertising a home "Under Contract" is pictured in Vienna, Virginia, outside of Washington, on Oct. 20, 2014. (Larry Downing/Reuters)

Commentary

A handful of years ago, you could be forgiven for thinking that the Chinese were taking over the U.S. real estate market.

Reports abounded of Chinese buyers pouring tens of billions of dollars per year into American property, seeking a safe haven for their wealth by snapping up everything from luxury condos in downtown Los Angeles to colonial homes along the affluent North Shore of Long Island, New York.

The COVID-19 crisis brought much of that activity to a standstill, but Chinese investment actually peaked around 2017 and started to slump long before the virus entered the scene. Thanks to increased regulatory scrutiny and a web of cross-border restrictions, Chinese purchases of American homes may not recover anytime soon. That’s probably good news for the U.S. housing market.

The Biden administration’s drive to combat money laundering in real estate underscores how the environment is changing for Chinese homebuyers. The Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Treasury, on Feb. 3 renewed its call for public comment on a proposed rule that would ramp up oversight of all-cash home purchases.

Under current regulations, title insurance companies must identify the individuals behind shell companies that make all-cash purchases of residential real estate in 12 major metropolitan areas if the transaction exceeds $300,000. FinCEN seeks to expand these reporting requirements as part of a broader crackdown on money laundering and other illicit activity.

“Our real estate markets are at risk of becoming a safe haven for criminals, kleptocrats and others seeking to park corrupt profits,” Deputy Secretary of the Treasury Wally Adeyemo said last December, when the proposed rule change was first announced.

Although the Treasury isn’t singling out Chinese homebuyers, it’s widely believed that many high-ranking officials of the Chinese Communist Party (CCP) launder illicit funds by purchasing expensive real estate in the United States.

For example, former Chinese official Jianjun Qiao and his ex-wife Shilin Zhao have both pleaded guilty to federal charges related to a scheme in which Qiao allegedly stole millions of dollars as the director of a grain storehouse in Henan Province. The funds were used, among other things, to buy two properties in Monterey Park, California, and a half-million-dollar house in the Seattle suburb of Newcastle, Washington.

A general view of the Seattle Skyline and Mount Rainier from Kerry Park in Seattle, Washington, on June 9, 2019. (Donald Miralle/Getty Images for Rock'n'Roll Marathon)

There’s no reason to think that most Chinese cash buyers are involved in money laundering, but enhanced federal scrutiny would likely snag more transactions. According to a report by think tank Global Financial Integrity, of the 23,659 real estate sales reported under FinCEN rules as of August 2019, 37 percent involved a person who was the subject of a Suspicious Activity Report, a tool that real estate professionals can use to flag potential money laundering or fraud.

Chinese homebuyers (and those from Hong Kong and Taiwan) also tend to pay in cash far more often than American homebuyers and to buy pricier homes than other foreign homebuyers, so stricter rules on large cash transactions would create yet more friction for a group already shackled by domestic capital controls.

The main bottleneck is on the other side of the Pacific. The CCP, through new currency controls imposed in 2017 and 2019, has made it dramatically harder for citizens to move their money overseas to buy real estate. Perhaps not coincidentally, Chinese investment in U.S. housing peaked at $31.7 billion during the 12 months ending March 2017, according to data from the National Association of Realtors (NAR).

By 2019, annual investment by this group—which NAR defines to include buyers from Hong Kong and Taiwan—had tumbled to $13.4 billion. The COVID shutdowns slashed that number to $4.5 billion in the year ending March 2021—a plunge of 61 percent from the previous year. Chinese-speaking buyers remained the leading foreign homebuyers measured by dollar amount, a title they’ve held since 2013.

Some hoped that the U.S. government’s lifting of COVID-era travel restrictions on dozens of countries, including China, last November would bring eager Chinese homebuyers back to the U.S. market. But the crusade against a respiratory virus continues to strangle global travel.

The United States tightened COVID testing requirements just a month after it dropped the travel ban, while China virtually stopped issuing new passports last August. Onerous testing and quarantine rules await any traveler that returns to China. How long these types of restrictions will continue to weigh on international travel is anyone’s guess.

It’s easy to exaggerate the impact of foreign homebuyers, who at last count made up only 2.8 percent of America’s nearly $2 trillion in annual home sales. Still, the long retreat of Chinese house hunters removes a potential source of pressure on the overheated U.S. market, where home prices have surged more than 30 percent since 2019 and inventory is at a record low.

For the time being, America’s would-be homeowners have bigger worries than competing with cashed-up Chinese buyers, but conditions could worsen if Chinese capital surges back.

A 2020 paper by Caitlin Gorback and Benjamin Keys of the Wharton School of Business found that U.S. home prices grew 8 to 15 percentage points more in zip codes with high numbers of foreign-born Chinese after 2011, a trend that fell sharply since 2018 amid tightening capital controls and the U.S.-China trade war.

“From an affordability standpoint, these neighborhoods are less accessible to existing U.S. residents as prices rise due to foreign investment,” the authors noted.