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Comment by nugget | Hacker News Reader

We'll know if/when China is actually successful in stemming capital outflows because we'll see it reflected in real estate prices in tier 1 North American cities.

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I have a friend who works for a commercial real estate development firm in Boston. They just finished a new apartment building in the BC/Fenway area and the lowest tier 1-bedroom studio (550 sq ft) is going for $3500/mo. He said they had the building fully let out within a month of opening, mostly to international students. He declined to specify nationality.

Most of my friends that have tried to buy a house in the San Francisco Peninsula have been outbid by Chinese paying 110%,with cash.

Someone posted a link here saying only 10% of houses were sold to chinese investors, meaning not enough to influence the bids.

Also from what I'm seeing winning bids in this market are at least 120-130%

It's a good point that prices in many countries are driven domestically (Australia!), however, I'd add/counter two arguments:

- there's a few papers out there (alas, I don't have them) that show that you can go as low as 4% active investors and still have an efficient market (although I'm not sure to what extent this extends to real estate purchases);

- even if the Chinese were not to touch real estate and stuck to treasuries, massive demand for treasuries would lower the cost of capital for everything else and therefore drive all asset prices (including and especially real estate) through the roof.

FWIW we recently went to visit some houses in Sydney, and 90% of those doing the tours were non-English-speaking Chinese. About half the agents were also Chinese, some with limited English skills. Anecdotes, not data, etc.

10% of transactions is enough to dramatically influence real estate prices. They become comps for subsequent sales.

It's more than 10%. Many Chinese buy via LLCs which makes ownership impossible to determine. I work with one HOA board in Seattle where 50% of the units are now owned by Chinese investors. They are debating whether to pass a restriction on renting out units (limited to some % of total units, and you have to join a waiting list until new spots open up). This type of restriction eliminates investors but immediately drops market value by 20%. Similar to the co-op system in NYC. Talk to a high volume realtor in SF, LA, Seattle, or NYC and you will hear directly from them how many foreign buyers are influencing the market.

Ditto in Cambridge, MA. Very frustrating for a number of my friends trying to buy a house.

I have a friend who is on a condo board on the Peninsula who has been claiming that tighter outflow controls have been affecting purchases since around April. I've been curious about whether this is just his perception or reflective of a broader trend.

Exactly right. But given the demand in those cities from non-Chinese buyers I expect it would take a while to see it actually reflected in prices. In the Bay Area at least there is also a lot of Russian money in the real estate market so it might mitigate some of the effect as well.

From what I've heard (realtor friend), the Russians prefer LA to SF. Sure, there's a "little Russia" in the Richmond district, but there aren't too many Russians interested in the Bay Area (unless they're working for Tech in the area, of course).

Interesting cultural insight about Chinese money preferring SF while Russian money prefers LA.

Is it really true that Chinese money prefers SF? Chinese money definitely loves LA, perhaps its impact is just more pronounced on a smaller city like SF? My knowledge on this is purely anecdotal, I'd love to see some data.

Real estate prices are extremely responsive to very small changes in demand. Chinese buyers compose the majority of international buyers in most investment markets. I see the ownership makeup of several 200+ unit HOAs where we are allowed to get insight into LLC ownership. If Chinese buyers quit buying my estimate is that San Francisco prices would fall by 10%. There are just not many domestic buyers at current prices. If the most recent wave of Chinese investors liquidated properties acquired since 2011, the market falls another 10%; although that's unlikely because they tend to have a buy and hold forever mentality. What surprises me the most about the current market is the fact that rents have been able to rise so much without hitting a harder affordability ceiling.

For every buyer there is also a seller. Usually, with real estate that seller goes on to buy more real estate (or if they were a developer, build more buildings). It will take quite a while for prices to drop because the market is not entirely Chinese buyers.

If you've lived through previous real estate cycles you know that prices can move very fast, especially to the down side. It would probably take 2 out of 3 of the following in order to trigger this in the Bay Area: meaningful interest rate hikes, market crash/tech firings, foreign money meaningfully drying up. One of the three would cause a slowdown but 2/3 causes the next real dip. It might not happen in the next couple years but it will happen at some point (''this time it's different'' - no). I don't know what you mean by ''usually'' but I'll say that about 30% of the Bay Area sellers I see move into other similar property (as evidenced by the filing of 1031 tax documents) and 70% either cash out an investment property and take the cash (almost all inherited properties fit in this bucket since the tax basis is market value and there is no tax due) or sell their primary home and move to a LCOL. I personally have no problem with foreign buyers participating in the market but we should incorporate this information into the debate about how to handle land use, zoning restrictions, and land taxation in the future (e.g. if foreign investors become a major ownership group in California, presumably residents would be in favor of higher property/land use taxes).

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