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US Real Estate to Fall in Value in 2019 Amidst Sell-Off From Chinese Investors

Last Updated September 23, 2020 12:15 PM
Joseph Young
Last Updated September 23, 2020 12:15 PM

In the third quarter of 2018, more than $1 billion worth of real estate properties were sold by Chinese investors in the U.S. amidst tightening regulations on capital outflows by China.

According to the Wall Street Journal, the European real estate market experienced a similar sell-off of properties, as investors from China liquidated over $233 million worth of properties.

Real Estate Sell-Off Expected to Intensify in 2019

Cedrik Lachance, the director of real-estate research firm Green Street Advisors, said that the prices of properties are expected to decline modestly throughout 2019, as the pressure from the high Federal Reserve interest rate and sell-off from Chinese investors continues.

“You’re probably going to see some cracks in property prices,” said  Lachance.

Throughout the past several years, investors from China have fueled real estate prices in major markets like the U.S., Hong Kong, and Europe.

Although capital controls in China were still relatively strict, it was possible for investors to circumvent many policies through the establishment of shell companies in Hong Kong.

However, since late 2017, Chinese authorities have started to tighten policies on capital outflows to prevent the value of the Chinese yuan from further dropping against other reserve currencies.

china yuan real estate prices
Analysts believe that a sell-off in the US real estate market could intensify in 2019.

Analysts including Tommy Xie, an economist at the Singapore-based Oversea-Chinese Banking Corp., said that capital controls were crucial in minimizing the loss of the Chinese yuan and the stock market, and it is highly likely to be sustained over a long period of time.

Xie said:

Capital controls have played a very big role in limiting outflows during this round of yuan depreciation. It’s very unlikely we will see disorderly outflows again.

Even if China and the U.S. come to a consensus and establish a comprehensive trade deal by the end of February, a deadline set by both countries, the government of China is expected to sustain tight capital controls and control capital outflows.

With a new PricewaterhouseCoopers report suggesting that many executives believe the prices of property asset classes including apartments and offices are already overvalued, the value of real estate properties in the U.S. is expected to undergo a correction in 2019.

“It appears that capital controls have restrained investment activity from China and from related Hong Kong asset managers,” a report released by PwC obtained by the Wall Street Journal read.

Mortgage Debt at All-Time High

In mid-2018, mortgage debt or housing debt reached $8.94 trillion in the U.S., nearing $9.99 trillion from the third quarter of 2008, when the U.S. entered a full-blown recession and experienced the worst financial crisis in modern history.

Many individuals acquired mortgages in late 2017 as the stock market of the U.S. entered a major bull market and major stock indexes such as the Dow Jones and S&P 500 demonstrated significant gains.

The majority of individuals expected the bull market to be sustained throughout 2019, but the market faced a correction. The lack of momentum in the stock market could lead individuals to liquidate their mortgages, unable to pay back their loans, which may potentially lead to the burst of a bubble in U.S. markets.

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