Chinese Investors Fuel California Housing Bubble

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Chinese Investors Fuel California Housing Bubble

Wealthy Chinese are gobbling up real estate in the Bay Area, but local opposition and an impending bubble signal danger.

Chinese Investors Fuel California Housing Bubble
Credit: REUTERS/Robert Galbraith

On an unusually clear March day in Northern California, Oakland Mayor Jean Quan gathered with several hardhat-wearing Chinese developers on a patch of dirt near the city’s waterfront. With local press cameras snapping away, the developers, led by China-based Zarsion Holdings Chief Weixun Shan and local planner Mike Ghielmetti, broke ground on “Brooklyn Basin,” a $1.5 billion development along a decrepit stretch of industrial waterfront.

Brooklyn Basin, which will bring roughly 3,100 new residents and 200,000 feet of retail space to Oakland by 2021, is just one example of major Chinese real estate investment in the Bay Area. Investors are descending upon the region in huge numbers: about 35% of Chinese residential real estate purchases in the U.S. occur in California, according to a study conducted by the National Association of Realtors. The same survey found that Chinese investments in U.S. real estate amounted to $22 billion in the year ending in March 2014, making up almost a quarter of foreign purchases.

“It is just a natural phenomenon.” Ellen Osmundson, Managing Partner of MJ Real Estate International in San Francisco explained to The Diplomat. “When more than 30 percent of the population in San Francisco is Chinese, it is natural that Chinese homebuyers are gravitating towards the culture, language and food that they are familiar with.”

The allure is getting stronger: San Francisco has always boasted scenic beauty, epitomized by the Golden Gate Bridge, the nearby wine-producing counties of Napa and Sonoma, and the winding California coast. The Bay Area also boasts exceptional local schools. But it is the region’s thriving economy, led by a surge of tech money from Google, Apple, and Facebook, and a legion of venture capitalists, that has put the region on the map in a new way, making the area a haven for elite companies and sought after jobs.

That has led to a burst in Chinese investment in condominiums and single-family homes. “Condominiums generally reflect the property type that these homebuyers are familiar with, and single family homes are the type of properties that resemble the picturesque American dream.” Osmundson says.

That dream is becoming much more appealing to Chinese buyers and speculators, with housing getting tougher to come by back home. China’s economy is slowing down and becoming more diverse: GDP growth fell below 10 percent in each of the past two years, and the real estate bubble in major cities including Shanghai, Beijing, and Hong Kong seems to have burst: housing starts across China were down over 18 percent in the first five months of 2014.  In April alone they fell 25 percent year-on-year.

Regulations are also mounting: Beijing has imposed new rules forcing developers to apply for pre-sale permits, in hopes of deterring speculators and increasing the supply of housing (although some of the regulations are starting to be eased.) Exorbitant down payments, which can climb to half of the purchase price back home (and a minimum of 70 percent for buyers purchasing a second home), compare to just 20 percent in the Bay Area. With the yuan getting stronger, investors have fewer and fewer reservations about investing in America.

For high net-worth Chinese who have assets of anywhere from $1.6 million and up, buying a single-family home or condominium looks like an increasingly good long-term investment: Bay Area housing prices surged by 2.4 percent in May. California-based realtors are doing more and more to entice potential buyers from China’s upper middle class of some 60 million people. Mandarin speaking tours, which lead investors around the South Bay near the headquarters of Facebook and Google, are growing increasingly common.

But these investments are drawing scorn from housing rights advocates representing lower-income residents in the Bay Area, some of whom have already blocked the routes of Google and Facebook commuter shuttles to protest the rising cost of living. Advocates brought their fight to San Francisco’s Board of Supervisors in April, protesting the city’s decision to allow tech companies to rent out city bus stops.

Osmundson does not see Chinese real estate investment as another challenge to the dearth of affordable housing. “San Francisco has been doing a great job in providing affordable housing for its residents. However, we need to be realistic and cannot keep demanding for the home prices to be like 30 years ago or like when we were going through the recession.” But outside of keeping City Hall happy, there’s no real incentive for developers to build affordable housing in San Francisco: it remains at the lowest end of the price scale and has not again re-attained peak values since the U.S. housing bubble burst in 2008. Most properties tagged as “affordable” in San Francisco really aren’t.

And there’s no doubt that China’s presence in the Bay Area market is driving up prices. As Mark McLaughlin, CEO of Pacific Union, a prominent San Francisco real estate firm, told local CBS affiliate KPIX, “it’s added a demographic of buyers who, generally, take a long-term view. They’re not sellers in the next five to seven years.” Chinese buyers are sitting on much of this property as housing in the Bay Area becomes increasingly scarce, causing its value to skyrocket. The Case-Shiller home price index, released in May, saw Bay Area home prices jump by 23 percent compared with  a year ago.

That may be just the beginning. On average, San Francisco real estate cycles take about five to seven years to run their course from recovery to collapse. The current surge in prices began in early 2012. Home values have shot up 50 percent since then; during the last surge, the prices peaked at 54 percent. Chinese money is likely to add pressure to the current bubble. The market may have at least two years of growth left, but price gravity will undoubtedly bring it back to earth before 2020. No one knows how hard that pull will be.

Still, for now, Chinese investors’ insatiable appetite for Bay Area real estate should only intensify as Silicon Valley becomes more central to U.S. economic growth. “Whether population increases are caused by the high tech boom, foreign investors or any demographic changes – people getting married at a younger age or people having more babies – all of these will drive the home prices up.” Osmundson says. Indeed, Chinese nationals still only account for a mere fraction of foreign buyers in the U.S. market (just 11 percent), and the ripple effect of these purchases remains mostly limited to the San Francisco Bay Area and other major urban locals.

Chinese mega-rich are investing healthy sums in these properties, betting on the long-term appreciation of the market. With local politics getting shakier and prices nearing the previous peak of their surge, that might not be as safe of a bet as they think.

Jack Detsch is a writerradio journalist, and researcher in the San Francisco Bay Area. He can be found on Twitter @JackDetsch.