Chinese Buyers of California RE = Fortunate Cookies

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Submitted by gzz on July 3, 2018 - 4:17pm

China's own real estate market has done fairly well, but appears to have underperformed all the major California markets.

Look at the Shanghai price index in the above link. It was at about 2500 in 2008, almost flat for a few years, and then moved up to about 4000 in 2017. That 60% nominal increase isn't bad at all, but California's major markets all did better.

Beyond that, buying as an investment in California would have also produced greater rents. I've heard many times that rent to price in China is among the worst in the entire world. Meanwhile in California rental income is pretty solid outside of a few really high end areas. All of my properties here in SD were solidly cash-flow positive on day one, including my late in the game 2016 condo purchase.

On top of all this, many Chinese investors in the USA got yet another bump of up to 10% from the rise of the dollar. For a good while it was semi-fixed at about 6.8 CNY per dollar, but from Aug 2011 to Dec 2015 it moved around a 6 to 6.5 range, and is now back up to 6.64.

As for other costs, China does not have a property tax, but taxes rents and property transactions more heavily. Looks like they take 12% of gross rent. At the very low 2% cap rate, that is pretty low. The reason for the lack of property tax is you don't actually own houses or apartments in China, rather you have 70-year leases from the government. There are plans to start taxing property next year however.

Submitted by FlyerInHi on July 3, 2018 - 8:39pm.

All good points gzz. That’s why I buy in USA so I can use rental income to rent a nice serviced apartment when I retire abroad.

Rents in USA’s major metros are higher because salaries are higher. In other parts of the world people park money in houses but they lack the higher paid jobs to support higher rents. In USA, people are more mobile and move more, thereby higher rents.

One thing I would note — comparing 2008 to now is kinda unfair because we had such a bad housing crash. For that period, the best performing markets were not California but Vegas, Reno, Phoenix, Florida, off the top of my head.

Submitted by gzz on July 5, 2018 - 2:15pm.

Here's some specifics on China's very high prices compared to rents:

Home rental yields in Chinese cities, which at certain levels can signify a property price bubble, continued to fall in the past quarter.
SCMP Today: HK Edition

The yields in 13 cities slipped below 2 per cent, suggesting an accumulation of risk in the market.

The rental yields in all the first-tier cities – Beijing, Shanghai, Guangzhou and Shenzhen – dropped under 2 per cent, while nine second-tier cities joined them, according to Shanghai-based E-house China R&D Institute, which compiles the data for 50 cities.

The average yields are below the level in major global cities such as New York on 4.7 per cent and Tokyo on 4.3 per cent.

The coastal city of Xiamen recorded the lowest average rental yield of just 1 per cent, meaning investors can expect to wait 100 years to recover their initial investment if they solely rely on rent. Rental yield in Beijing touched 1.4 per cent, the lowest among the first-tier cities, meaning a property’s price is on average 71.4 times its annual rent.

I'd guess San Diego condos are about 20 times annual rents. So a $500,000 place in San Diego would go for about $2100 a month but a $500,000 place in Beijing would rent for $580 a month.

Rents in China of course are likely to increase faster than in the USA because they have a 5-7% long term GDP growth compared to our 2.0-2.5%. But it will take a looooong time for $580 to catch up with $2100 (and slowly growing).

Submitted by spdrun on July 5, 2018 - 4:52pm.

Basically, China is in a massive R.E. bubble that dwarfs the US 2008 bubble. Watching it reset will be amusing.

Submitted by gzz on July 6, 2018 - 10:29am.

I don't see a RE crash happening in China. The people buying when they know rents will be low are aware of it, and buying anyway. Mortgages are pretty conservative there, with lots of cash sales and lots of 50% down sales.

More likely a really long period of prices being flat to up 1% against a background of 5-7% inflation.

Submitted by FlyerInHi on July 6, 2018 - 1:13pm.

China is following the Singapore model (developed by a Dutch economist), a mix of Asian values, free market economics, and government control, on a grand scale.
If the banks fail, China will just take over the loan portfolios, socialize housing and move the workers into the apartments.

I read the Economist and once believed the editorials. So wrong!
The China crash has been predicted so many times since the 1990s. Hong Kong was going to be a wasteland once the Brits left. HK is now richer than ever, with the highest housing in the world. Ha!

The reality is that China’s mix of free markets and policies work. They don’t just work, but they work in spades.

As Trump says, “we will see” how the trade war turns out.

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