The negative impact of foreign investments in American
residential real estate might have been badly overlooked by some U.S.
government officials — and the potential harm it might cause is largely unknown
to the average American. Reports from a variety of sources suggest that a
housing recovery is taking place, though not at the pace expected. As of last
month, it was still some 16% below its peak in 2008. Yet at the same time, some
U.S. cities are experiencing an unusually high demand for residential real estate,
with buyers outbidding each other, often by tens, and sometimes hundreds of
thousands of dollars. The same kind of outbidding was going on just prior to
the 2007 real-estate crash where wealthy buyers, mostly foreign, were buying
homes by paying for them in cash.
Average American home owners, of whom one in three is
on the verge of financial ruin, aren’t fueling such buying frenzies.
Skyrocketing real-estate prices in America's selected urban centers are
likely the result of a foreign influx of cash, more particularly mainland
Chinese money, which is now flooding major American cities in the billions of
dollars.
Last year, Bloomberg revealed a secret path that
allows wealthy Chinese to transfer billions overseas. Before that, The Wall
Street Journal outlined the questionable mechanics of moving cash out of
China, where wealthy mainland Chinese bring their funds to Hong Kong and from
there to other parts of the world. Most of it ends up invested in favorite
foreign destinations — namely the U.S., Australia, and Canada.
Data from a Global Financial Integrity December 2012
study show that China topped the list of developing countries sending
illicit money abroad, exceeding $2.7 trillion for the decade through 2010. In
2010 alone, it totaled $420 billion. You can bet your last dollar that a
good chunk of that Chinese money (of dubious origin) was earmarked for
residential real-estate purchases, that is, the roofs over American heads.
The Chinese government turning a blind eye on their fleeing
currency is best summarized by Jim Antos, a Hong Kong-based analyst at Mizuho
Securities Ltd., cited in the Bloomberg article above. He said that the Chinese
government has been trying to internationalize their currency for a lot longer
than we thought — with the goal of allowing their Yuan to become freely
convertible with other currencies. One can get a more thorough look at the
workings of Chinese economy by reading “Trillions of Dollars Missing from the
Chinese Economy,” written by Michael Pettis, a senior associate at the Carnegie
Asia Programme and professor of finance with Peking University’s Guanghua
School of Management.
The National Association of Realtors profiled
international home buying activity for 2014. Purchases of U.S. real estate by
international clients made during the 12 months ending March 2014 show the
total sales volume estimated at $92.2 billion — a 35% increase from the
previous period's level of $68.2 billion. Nearly half, $45.5 billion, of it was
attributable to nonresident foreigners which accounted for some 3.5% of the
total U.S. existing home sales market of $1.2 trillion. If this trend
continues, foreigners will own over 35% of residential real estate in the U.S.
over the next 10 years.
General wisdom suggests that a foreign input of moneys
flooding commercial U.S. markets might be a good sign for American corporations
— but when large sums of those funds are used for snatching up residential real
estate, it will, in due time, drive the prices of homes out of reach of
middle-class Americans, rendering them unable to afford homes in their own
country. Overpriced hubs such as San Francisco, New York, Dallas, Denver,
Seattle and others are already becoming out of reach to most Americans.
Last month, over 25,000 concerned residents in Vancouver,
Canada, signed a petition pleading with their government to curb the
foreign buying of Canadian real estate. Responsible Australian leaders have
already taken proactive measures to mitigate their own problems in
this regard. They pledged stiff application fees and in some cases outright
prohibition of any Chinese investors buying into existing Australian
residential real estate. The same, if not more stringent measures should be
imposed by the U.S. government. The primary goal of American leaders should be
to assure their citizens’ well-being.
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