An intensifying US-China trade war is sapping business and market confidence. Renewed talks of escalating tariffs and trade sanctions between the two countries, in May 2019, are hitting the financial markets hard, on both sides, and with weakening global growth, this could very well bring on a global recession.
How has the US real estate market dealt with this scenario? What would happen if Beijing and Washington are unable to reach an amicable solution?
China Constitutes the Largest Foreign Buyer Segment for US Real Estate
China toppled Canada in 2014 to account for the largest share of foreign buyers in the US real estate industry. In 2018, 25% of the total foreign investments in the US residential real estate sector were accounted by Chinese buyers, according to the National Association of Realtors®. This, despite the Chinese government always having created hurdles for its citizens, who desire to invest overseas.
In July 2018, due to intense pressures from their home government, Chinese insurers, investors and conglomerates started selling-off US commercial properties, reversing the year-long buying spree, during which they had made huge investments in properties like New York’s Waldorf Astoria Hotel. For the first time in 10 years, they turned net-sellers of US commercial and residential real estate, selling $1.29 billion worth of real estate investments.
This retreat of Chinese investors has slowed down the US real estate sector. Property prices plateaued in 18 months of trade tensions between 2017 and 2018, after rising to significant levels after the 2008 crisis, according to an article by The Wall Street Journal.
Unlike other foreign investors, Chinese buyers have not spread their investments evenly across the entire United States. Over 40% of the community has purchased properties in the West Coast, particularly California, which is home to a vast Asian community, says an article on ETF Daily News.
With the retreat of Chinese buyers, property prices in these areas could suffer a large setback. Along with California, some other areas that could be affected include the New York metropolitan area, Florida and Texas. Also affected will be the residential real estate markets of college towns like New Haven and Princeton, where Chinese students are living in large numbers.
What Does the Future Look Like?
Geo-political stability drives the world of real estate investments, and both countries are doing little to inspire investor confidence. In a survey of global real estate investors by AFIRE, 80% of participants felt that rising trade tensions would affect cross-border project commitments in 2019, according to an article on Pere News. They expressed concerns about rising costs of construction and raw materials. President Trump’s recent decision to increase tariffs from 10% to 25% on another $200 billion worth of Chinese imports and China’s retaliation in May 2019, will likely result in an increase in prices of consumer goods, raising construction costs further.
If the Fed decides to hike interest rates to curb inflation, the required returns on competing investments will rise and real estate values will fall. But, so far, the US Federal Reserve has preferred a dovish stance on monetary policy for the rest of 2019. In fact, the Fed is under intense pressure to cut rates from the office of the POTUS.
Image Courtesy: The Financial, In US, Real Estate Still Leads Stocks as Best Investment, May 2019 (https://www.finchannel.com/world/america/77298-in-u-s-real-estate-still-leads-stocks-as-best-investment)
On a positive note, US real-estate stocks are currently on a meteoric rise, in response to a de-escalation of the US-Mexico trade crisis, and news that President Trump will meet the Chinese President for further negotiations during the G20 summit to be held in Osaka, Japan, in June 2019.
If the situation worsens, US real estate values might face a setback in 2019. But, the exit of Chinese investors will definitely be good for US buyers, looking to buy property in the more expensive Golden State markets, like San Diego, San Francisco and Los Angeles. Lack of competition from foreign buyers will allow locals to get good deals.