Keep An Eye On China’s Real Estate Market
There is an old saying when it comes to global economics that when America sneezes, the world catches a cold. This is a relevant quote, even for the real estate market. It is important because it highlights the globalized nature of our economy. No nation is truly independent. Every nation on earth relies on other nations for economic success and even survival. In the United States a vast majority of the goods and materials we rely upon are sourced in other nations. Thus, when other nations experience supply shocks or other economic catastrophes, the fallout is often felt on our shore too. Right now, the second largest economy in the world is experiencing a shakeup. China is experiencing extreme economic volatility, especially in the real estate sector. What is happening with China? What does it mean for the United States? What do home buyers and homeowners need to know?
Chinese Real Estate Impacts American Homeowners and Home Buyers
Unraveling what is going on with the Chinese real estate market and how it impacts American home buyers is a bit complicated. First, it is necessary to understand what is happening to the Chinese real estate market, which is not always straightforward. Second, it then means translating how what happens across the Pacific Ocean impacts us here at home. Basically, we are asking if it is true that when China sneezes, do American homeowners catch a cold. The team at Peoples Choice Mortgage will dig into all of this so that home buyers and homeowners can be prepared.
The State of Chinese Real Estate
While there has been a lot of debate about whether or not the United States’ real estate market is in a bubble, there is no debate with China. China’s real estate market is absolutely a bubble and it seems as if it is popping. Real estate currently represents about 30 percent of China’s GDP. Many investors have been betting for decades that real estate development is a golden goose that would forever be protected by the government. Over the past couple of decades, China has sought to become the world’s dominant economy. Part of that play has been predicated on boosting domestic development. This has led to private groups and local governments investing countless dollars to build housing across the nation. Their assumption was that the government would support this development at all costs no matter what.
Soon, much of Chinese real estate became speculative. Many domestic groups were betting that real estate would always experience growth, so they invested more and more to encourage more housing. Soon, it was not only Chinese interests that were betting on infinite real estate expansion. Many foreign investors soon also started betting big on Chinese real estate which expanded construction and speculation. Unfortunately, real estate development extended too far too fast. As we stand today, nearly 20 percent of Chinese properties are left vacant. There simply are not enough people for all the houses and apartments that have been built. At the same time, all the developers who bet big on real estate’s infinite expansion have taken on nearly 5 trillion in debt. This debt exposure is threatening the viability of all these developers and the Chinese economy as a whole.
Unfortunately, this debt is turning very bad very quickly. Over the summer, the Chinese government started to crack down on real estate speculation. They viewed rapidly rising housing costs as a threat to social cohesion and took on real estate’s biggest players. Also, they looked to cut down on big construction projects to try and limit greenhouse gas emissions. This change by the Chinese government signaled that the days of infinite real estate development were over and now many are on the hook. Now, some of the world’s largest companies, like Evergrande, are on the verge of defaulting on their debt. Basically, China’s real estate bubble is bursting and the consequences will be felt around the globe.
Will China’s Real Estate Bubble Impact American Home Buyers and Homeowners?
Many fear that China’s bursting bubble will impact economies around the globe because of how much outside investment was also betting big. The Federal Reserve has recently warned that China’s economic woes could spillover to the US market. Many are worried that as big players such as Evergrande and Kaisa default on their debt that it will be a contagion that infects global bonds. In this scenario a Chinese sneeze could cause the global economy to go on life support.
While China’s real estate collapse does pose a risk to some of America’s biggest investment groups, it might provide opportunity for others. For the past year and a half, home buyers in the United States have been facing a supply crunch. Demand from home buyers has been through the roof thanks to mortgage rates remaining near historic lows. The problem has been that the supply of available houses has not been able to keep up with demand. In turn, home prices have soared to record highs. One of the biggest barriers to increasing the supply of houses has been a lack of materials. Home builders have been facing shortgages of nearly everything that is needed to build houses. They have had a hard time finding lumber, aluminum, wiring, and even paint. This is causing home construction to face extreme delays and price run ups.
The silver lining from China’s real estate conundrum is that their construction cooldown could free up supplies for US home builders. As China cancels building projects, American home builders will now find it easier to get the things they need to build the homes you want. As Chinese demand eases, prices of building materials will start to fall. This means that home builders could accelerate projects under construction and could begin new projects without fears of supply shocks. This would be great news for home buyers. An influx of newly built homes would slow the rise in home prices and would also decrease the likelihood of bidding wars. Basically, China’s real estate bust might end up being an American home buyer boom.
Final Thoughts
Global economics is very complex and it is hard to precisely predict the fallout of China’s real estate crisis. However, if it does end up freeing up building materials for US home builders then US home buyers will be the big winners. This would allow home buyers to take advantage of low mortgage rates and buy the house of their dreams. Overally, this should give any home buyer some optimism about buying a home in the new year.
While it will take time for some of the supplies to make their way to home builders and for inventory to be built, home buyers should prepare now. The best thing home buyers can do to prepare for future inventory is to be prepared to pounce on available deals. This means getting your ducks in a row now. To make sure you are ready for a favorable home buyer environment, do what you need to line up a home loan. The process of applying for a home loan can take some time, so it is wise to do that now well in advance of when you plan to buy.
Working with a mortgage broker to get prequalified for a home loan will put you in an advantageous position to take advantage of great deals. Peoples Choice Mortgage offers a complimentary home loan qualifier to anyone who wants to be ready to buy a home. If you want to be ready to make your dream of buying a home a reality, contact us now to be ready for the opportunities of tomorrow.
