China's capital controls are working, and that's bursting the global real-estate bubble


#1

Originally published at: http://boingboing.net/2017/01/28/chinas-capital-controls-are.html


#2

This is good news for ordinary middle class people in London and elsewhere. London being a centre for the concealment of laundered money has long been a scandal but the Chinese and the Russians have kept it going.
We could now be about to see how sick leaving the EU will leave the British economy as the bubble bursts.


#3

I just hope this all leads to a gradual deflation of the bubble over the next 3-4 years rather than a hard landing like 2008. Otherwise, you’re left with more reasonably priced homes (great!) that local middle-class people still can’t buy because they can’t get a mortgage from skittish banks or because they’ve been thrown out of work by the fallout from the burst (not so great).

While the focus on foreign buyers gets a lot of the press, ultimately it’s boring local regulations affecting the local people who make up 85%+ of buyers in most hot markets that will have a bigger impact on cooling things off. If it’s managed correctly you won’t have non-speculators getting caught up in situations like margin calls on properties that are suddenly underwater.

Also, whatever the effects of the Chinese capital controls end up being in the West, we should always keep in mind that their intention is to exert greater control over their own citizens at home. It is another instance of the authoritarian turning-inward (in trade, in cultural sharing, in exclusion of immigrants and refugees, in isolationism etc.) we’re starting to see play out in different ways around the world. The current U.S. administration is already looking at applying punitive control measures to remittance payments headed for Mexico mainly because it suits its right-wing populist barrier-building agenda.


#4

In the US unsecured loans based on home equity / fico score / etc. are once again the norm. That’s how we got to the Mortgage Meltdown / Economic Collapse the last time round.


#5

I expect the effect will be moderated in large cities, but I can see this having a pretty instant - and sharp - impact on specific areas of places like Australia and Southern California where they’ve been building whole suburbs explicitly for Chinese buyers. This could be pretty ugly in some markets.


#6

Problem is when these bubbles burst, you quickly discover everyone owes everyone else money they don’t have and all they have left to sell off for liquidity is property that just lost all its value because everyone else is selling theirs all at once too. This usually unravels in a giant chain reaction explosion, not a gradual downturn, as panicked creditors call in debts that have dwindling chances of ever being repaid over property that isn’t worth the principal.

And from the sounds of it, these aren’t homeowners who would fight to keep their primary dwelling in a downturn, it’s just a foreign investment gone bad that they’ll walk away from and leave the affected country holding the bag.


#7

Wow, that’s going to sting. The fates of those developments will be worth watching right now over the next year, to preview the effects on the larger RE market of the foreign buying spree hitting a (Great) wall.

If what @Papasan observes above about the non-foreign buyers is true then I agree the chain reaction is going to be sudden and traumatic rather than moderated.


#8

Good. Bubbles are meant to burst.


#9

I live in Vancouver and I’ve heard this for the last two years. I would prefer a soft landing but it seems that’s not to be.
Buuuuuuut, this is still just conjecture, I want to see real evibence, prices dropping, low sales etc. We’ve seen a bit of that, but nothing yet to justify a bubble. Yet the price are still bats shit high with no end in sight that not at this point a guess.
And any one who’s excited by the idea of a hard crash should look at the side effects of 2008.


#10

Do you have an article on these Sydney suburbs?


#11

I don’t know about Sydney, but
NYTimes article mentions suburbs specifically being built for the Chinese around Perth:

And another about how important Chinese buyers are for the whole market (more than a tenth of all Australian house sales), which is driving up prices in places like Sydney:


#12

There’s a difference between developments built exclusively for foreign investors (chinese) and developments that happen to be heavily marketed towards foreign investors. And one or two developments do not make up an entire property market.

I would agree that foreign investment, from China and elsewhere, is a factor in Australia’s eastern metro property market. And it certainly is taken to be a scapegoat for the seemingly endless rise of property prices we’ve seen.

But i always get slightly concerned that by identifying this as the main cause for property prices rising ignores other factors - iron clad confidence in property appreciation by mum and dad investors, preferential tax treatment for property investment (negative gearing combined with 50% discount of CGT + ability to leverage), attraction of melbourne + sydney over regional towns/cities and limited supply. These factors are considerable feeding the ‘bubble’. Unfortunately for those investors late in the day, the more that pile in, the higher the prices, and the lower the actual return in the long run. Although I guess Chinese investors are unique in that they are not necessarily looking for a steady % return, rather, they are into asset protection from a government that does not adhere to the rule of law and could conceivably seize their assets at their discretion.

There’s always a mild bit of xenophobia in the comments as well. Not to suggest that you are. However, the mainstream press is breathless in it’s accounts of Chinese investors (as they were with Japanese investors in the 80s), but they’re never up in arms about the amount of investment by other foreign nations - US, UK or NZ nationals, for example - who are regular and established investors in Australian property.


#13

On the one hand, I have had some satisfaction in seeing the absurd value on our annual property assessment, which has no rational relationship with the actual utility of our home. I could sell it and set up quite nicely in a non-bubble location.

On the other hand, my kids will one day want to live in a home, and I’d sure like for them not to have to move to Winnipeg or somewhere just to afford to live.


#14

There were bubbles after the Japanese stopped buying properties in the west, and there will continue to be bubbles after the Chinese stop.


#15

Bubbles don’t really have soft landings as an option. Especially not today when everyone keeps operating at unsustainable leverages as a matter of course. And the real estate bubble and the services around it are a huge source of prosperity for places which is now going to leave very suddenly.

It’s not going to be pretty and in the UK it lines up quite well with the hard Brexit that’s in the books apparently.

Interesting times and all that.

It is another instance of the authoritarian turning-inward (in trade, in cultural sharing, in exclusion of immigrants and refugees, in isolationism etc.) we’re starting to see play out in different ways around the world. The current U.S. administration is already looking at applying punitive control measures to remittance payments headed for Mexico mainly because it suits its right-wing populist barrier-building agenda.

Actually you could make a case that this was always going to happen. Capital can move wherever it likes, but people can’t. We half pretend we are citizens of one large global country with one market and, basically, one currency and half pretend we all live in independent nation-states. This sort of odd hybridization cannot stand, I don’t think. It leads to a lot of situations where your course of life is determined by distant elections you aren’t allowed to take part in and never will.

Turning inwards is the natural response: within nations is the one place we still have democracy. Occasionally.

The worldwide surge to the Right is to be expected, really. The mode of governance for globalization is oligarchy—which is never popular, and the people who are supposed to give the anger of the people shape, the left, have been asleep at the wheel more interested in keeping their political positions nice and cozy than actually doing something. This left a vacuum that asshats (technical political science term) have filled and so here we are.

Yay.


#16

That’s been one of the fatal flaws of globalism: goods and capital could cross borders with relative ease, but labour could not (at least, not legally).

The best resolution from a liberal/progressive/anti-nationalist POV would have been the incorporation of an EU/Schengen-like arrangement into free trade agreements, but that never happened because centrist parties were more concerned with placating bigots and exploitative corporations (see also health insurance in the U.S.). Thus the decades of imbalanced trade agreements that prioritised corporate persons over human ones until a demagogue convinced them that brain-dead isolationism and protectionism was the only alternative.

So we now have this awful turning-inward as reaction: no free transit of labour (or, increasingly, refugees and students and even regular travellers), for sure, but also new tariffs on goods and more crackdowns on individuals moving their assets wherever they like. Anyone who thinks that last crackdown is an unvarnished good should remember that it’s a favourite tool of authoritarian regimes who want to keep their citizens (including non-millionaires) locked within the country.

For now. Right-wing authoritarians are busy chipping away at that in the West, too, often enabled by their Uncle Vlad.


#17

It’s an option if there’s a responsible government in place.

Agreed, agreed. Bubbles don’t deflate (they burst) but they can be deflated. Agreed.

The best resolution from a liberal/progressive/anti-nationalist POV would have been the incorporation of an EU/Schengen-like arrangement into free trade agreements, but that never happened because centrist parties were more concerned with placating bigots and exploitative corporations (see also health insurance in the U.S.). Thus the decades of imbalanced trade agreements that prioritised corporate persons over human ones until a demagogue convinced them that brain-dead isolationism and protectionism was the only alternative.

I disagree, actually. The problem is deeper than that. Yes, it would help but people aren’t rootless. They can’t just move where the wind blows following money around. There are costs to traveling around the world following your job around: material (you have to physically move) and personal (no stable friendships, at most limited family life, having to be a stranger everywhere you go, always having difficulties with the language…).

In my neck of the woods, d’you know, there is a group of people (ones I am descended from, in fact) who were master stonemasons in times long past and also carpenters, bricklayers—anything you need, really. They traveled far and wide selling their services before returning to their homes in the winter with what they had earned. The name they had for this activity of traveling far for work was ‘pechalba,’ which derives from ‘pechal’ meaning ‘inconsolable sorrow, desolation, misery.’

Telling don’t you think? By and large, people are meant to settle in one place and this is no bad thing.

So we now have this awful turning-inward as reaction: no free transit of labour or people, for sure (see Brexit), but also new tariffs on goods and more crackdowns on individuals moving their assets wherever they like.

I maintain that this is an inevitable response to universal corporate capitalism and concomitant oligarchy. This isn’t a good response, but it is inevitable: not a product of uniquely bad individuals or some patina of general wretchedness, but one thing following another.

On the plus side, if we live through it we might be able to finally fight for a left-wing response.


#18

I think people do evolve in this regard, helped along by technology and cheaper energy. There was a time as recently as 150 years ago when the vast majority of people spent their entire lives within a 20-mile radius from their homes. We now live in a world of relatively cheap long-distance travel and the ability to make new friends and keep in contact with old ones over the Internet no matter where we are.

That’s not to say that everyone can pick up and move on a whim or that permanent migrant worker status is great for everyone. I agree most of us still need roots, or at least a home base. But in order to grow and gain fulfillment as humans also need options: to escape a toxic or dysfunctional or just plain incompatible home base for another; to explore and expand our horizons and connect to other cultures and individuals; and to engage in commerce. We had a nice run of more people in the West having those options, but it’s closing back into the more narrow-minded and provincial world of old. Now only the wealthy will have those options.


#19

I’m trying to grasp the difference between a leveraged market bursting like 2008 and a discontinuation of cash buyers. 2008 put a lot of properties on the market and dried up loans, but a cash buyer is not underwater, not under that pressure, they can just hold without needing to sell. Developers left holding the bag with properties that won’t bring in their prospectus prices would be in trouble, but would that be enough to move from “cooling off” to crash? In 1987 a lot of them simply converted to rental to ride out the market and went condo in the early 2000’s.


#20

What do you have against Winnipeg?