Over the past few years, China’s residential and commercial real estate markets have been contracting. It started out like a train crash in slow motion, but now it is definitely off the tracks and going over a cliff. a pattern that strikingly resembles that of the United States in 2008 and 2009. A significant bubble was produced by lax lending criteria, affordable financing, and the widespread notion that real estate values would never fall.
Earlier Chinese summer, word of Evergrande’s significant debt and Country Garden’s impending demise broke. There is a danger that the industry will drag down an already weakening Chinese economy, especially in light of the most recent reports of blatant fraud and theft by Evergrande leaders.
Because of China’s enormous economy, the rest of the globe might catch a cold if they sneeze. Chinese investors have international real estate holdings, and if they suddenly had to sell those holdings to offset losses at home, the real estate markets of many other nations may suffer. Some high-end residential markets in the United States that experienced a surge in Chinese purchasers may be particularly at risk.
Investors who have lost money due to events in China can start spotting ghosts in other markets and conclude that the risk profile is simply too unfavourable. This can make it more difficult and expensive everywhere to raise money for new development projects.
Although there is a risk that Chinese owners may sell off their real estate holdings in the United States, the data actually shows the opposite trend. Chinese spending on residential real estate in the United States more than doubled in the 12 months before to March 2023 compared to the previous year.
This suggests that many in China with capital consider the U.S. market as a safe haven. In addition to looking for safer investments, they are also drawn to dollar-denominated assets due to the ongoing yuan devaluation.
The lower risk profile of the US market is also likely to attract real estate investors from other nations. Together, these factors will boost demand for and price levels for real estate.
The Fed has already voiced concern over potential fallout from China’s economic difficulties. The Fed may decide to stop, or even reverse, rate rises if these worries get serious enough. No matter what the Fed does, any sizable increase in real estate investment from China and other nations will cause interest rates to decline.
A crisis anywhere is never “good news,” given how interrelated the world’s economies are, and given the magnitude of China’s economy, recent developments have the potential to jolt other countries.
Even negative news, though, frequently has a bright side. The U.S. home market develops into a relatively safer investment destination while the Chinese real estate market struggles. This capital inflow will therefore tend to lower mortgage rates, perhaps alleviating one of the main problems preventing the US real estate market from experiencing a full rebound.