For months/years we've covered the many real estate bubbles that have been inflating all over the world courtesy of Chinese billionaires looking to launder money offshore (here are just a couple of examples: Vancouver, Sydney and New York). But a new set of capital controls enacted in China on January 1st, and aimed specifically at curbing foreign real estate investments, may just be the needle that finally pops all those bubbles.
As Bloomberg pointed out earlier this month, the following new restrictions on foreign currency transaction were implemented earlier this year.
- Customers must pledge money won’t be used for overseas purchases of property, securities, life insurance or investment-type insurance. While such rules aren’t new, citizens previously didn’t have to sign such a pledge
- Customers must give a more detailed account of the planned use of funds, such as business travel, overseas study, family visits, medical treatment, merchandise trade or purchases of non-investment insurance policies, including the timing, by year and month
- Violators of foreign-exchange rules will be be added to the currency regulator’s watch list, denied foreign-exchange quota for three years and subjected to anti-money-laundering investigations
- Customers must confirm compliance with restrictions on money laundering, tax evasion and underground bank dealings
- Customers must now confirm they aren’t lending or borrowing quotas to or from other citizens
And while some of the new capital controls above may not seem that onerous, they're already threatening real estate deals from London to Melbourne as Chinese buyers are finding it increasingly difficult to fund down payments.
In London, Chinese citizens who clamored to purchase flats at the city’s tallest apartment tower three months ago are now struggling to transfer their down payments. In Silicon Valley, Keller Williams Realty says inquiries from China have slumped since the start of the year. And in Sydney, developers are facing “big problems” as Chinese buyers pull back, according to consultancy firm Basis Point.
“Everything changed’’ as it became more difficult to send money offshore, said Coco Tan, a broker at Keller Williams in Cupertino, California.
Less than a month after China announced fresh curbs on overseas payments, anecdotal reports from realtors, homeowners and developers suggest the restrictions are already weighing on the world’s biggest real estate buying spree. While no one expects Chinese demand to disappear anytime soon, the clampdown is deterring first-time buyers who lack offshore assets and the expertise to skirt tighter capital controls.
“If it’s too difficult, I’m out,’’ said Mr. Zheng, 66, a retired civil servant in Shanghai who declined to give his first name to avoid attracting regulatory scrutiny. He may abandon a 2.4 million yuan ($348,903) home purchase in western Melbourne, even after shelling out a 300,000 yuan deposit last August. He’s due to make another big payment next month.
As further evidence that the tighter controls are working, Chinese banks last month registered net inflows under the capital account for the first time since the yuan’s devaluation in August 2015.
Moreover, as Bloomberg points out, several new construction luxury buildings are now at risk of losing contracted sales as Chinese buyers, once flush with cash, are finding it very difficult to make progress payments.
At The Spire in London, a 67-story tower with sweeping views of the River Thames and flats starting at 595,000 pounds ($751,901), prospective buyers were caught off guard by the new rules. Less than 70 percent of clients who signed purchase contracts last year have made their initial payments, with the rest now facing “problems,’’ a press official at Greenland Holdings Corp., the project’s Shanghai-based developer, said on Jan. 12. The official asked not to be named, citing company policy.
While Beijing’s policy tweak may appear symbolic on the surface, it’s likely to cause a “notable reduction” in Chinese purchases of Australian property, according to Christopher Todd ‘CT’ Johnson at Basis Point, a consulting firm that specializes in business relations between the two nations. Australia approved A$24 billion ($18.1 billion) of real estate investments from China in the fiscal year ended June 2015, the most recent figures available, making the country by far the biggest source of foreign buyers.
And with one bubble on the verge of popping, the only question to answer now is which asset class speculative Chinese billionaires will cause to bubble over next?