The wine is pouring, the food stamps are soaring…
I would like to share some insights regarding the diaspora of capital flight from China, as well as the transformation of the real estate market during the Covid-19 era.
Let’s not fool ourselves. What, after all, was Donald Trump’s profession before his ascension to the presidency? It shouldn’t be a surprise to anyone that real estate prices have shot to stratospheric levels since Trump took office, even with tens of millions of people currently unemployed. Sadly, more and more tent cities have popped up across America, and an entire generation has been prevented from joining the property-owning class. We see housing whether it be through taxes,rents,mortgages and urban planning as a way to extrapolate every dollar out of what’s left of the American middle class. One of the main drivers of this process is Mainland China’s wealth purchasing land in the United States.
While overseas residential real-estate purchases climbed steadily between 2011 and 2017, peaking at $153 billion in March 2017, the number of foreigners purchasing homes in the U.S. plummeted by 31 percent between April 2018 and March 2019. In that period, foreign buyers purchased 183,100 properties valued at about $77.9 billion, down from 266,800 properties valued at $121 billion in the previous 12-month stretch. (This does not include foreign cash buyers, as there are no statistics on this trend, only guesstimates.) The objective from our techno-oligarchs appears to be to extract money from China by any means and will happily buy at the peak of a housing bubble causing a bigger gap between the haves and have nots.
To the Chinese, ownership of real estate is appealing because it confers status. But another reason for Chinese citizens to pursue home ownership stems from their general distrust in the stability of the yuan and a safeguard against inflation. The Han people tend to believe that the U.S dollar is a much safer bet, so if there is a way to move cash into assets like real estate and western nations encourage it with such things like the EB5 visa and smurfing, why wouldn’t they take advantage of such an opportunity? Recently the CCP clamped down on such “capital flight,” but the damage has already been done. Chinese citizens have bought up residences in the United States and Canada (see the Vancouver Model), as well as in Cambodia’s Kompong Som Province(currency pegged to USD), in Sydney Australia, and in Pakistan’s port city of Karachi. These locations are considered either politically stable, are located in municipalities which retain strong property rights, or are situated in regions generally free from natural disasters, making them prudent investments.
How did this happen?
Most people will say that this trend began with Nixon and Kissinger opening up China or the obvious outsourcing of jobs, but one must have a broader, more kaleidoscopic view when it comes to China’s rise. The CCP witnessed Russia rapidly morphing into a Hobbesian nightmare in the early 90s and noted the do’s and don’ts when transitioning from communism to a free market. In post-Soviet Russia, a handful of oligarchs ran roughshod over its citizens, causing political disharmony and economic stagnation. Subsequent Russian reform gave former Soviet higher ups power but with no money, thus conferring a (then- exiled) mafia with money but no power.
Learning from Russia’s mistakes, the Chinese Communist Party took a bottom-up approach with the state slowly letting line out. An example would be a ceramic tile factory, where the managing director who already knows the ins and outs of his job, inherits his business from the state. Congratulations Mr. Yang! It’s yours and if you blow it a CCP crony will take it back. Mr. Yang has no debts and is given a clean slate to start building wealth selling products around the world. But what to do with this wealth? Being past its 3rd world stage of growth of paving roads, building hospitals etc. China began moving towards a consumption-based economy. What better way to jump-start this new phase than building a secondary housing market, or better yet, by buying land in countries with strong property rights? A series of housing reforms went into effect in the late 90s, allowing consumption to skyrocket. China’s 10th Five-Year Plan, passed in 2001, set urbanization as a national strategy to stimulate demand by selling communal land and make the housing market a new engine of China’s economic growth.
The well-known “Ghost Cities” are projects that help the less well-off or well-connected to obtain a piece of the dream of “owning” real estate. To help fuel China’s already inflated GDP, Xi Jinping encouraged a nationwide construction binge in conjunction with One Belt One Road. As a result, developers overextended themselves, leading to the construction of over 7 billion square meters of unfinished floor space. In the west the concept of “if you build it they will come” is forgein but in China they love to flaunt their vacant properties and if they don’t come, they will be forced to. I used to laugh when visiting these ghost buildings in 2nd tier cities in Thailand and outskirts of Phnom Penh, where there would be dummy models of a Dunkin Donuts or a Louis Vuitton in a commercial space. But in Asia they see future potential letting their imaginations run wild of untold fortunes or as I like to say sarcastically “Lucky Lucky 777 Gold Fortune Horse Good”.
In China, land is not owned, but leased. Property value is mostly based on the years left on the lease. The bulk of residential properties leases in China are not set to expire until the second half of the century. What will happen then one can only guess, but property values have already been on the rocks due to negligence of developers. From an engineering standpoint, the lifespan of a Chinese apartment building is between 25-30 years. A building that can be torn down every 25 years is more profitable then one that can stand for a century. It’s a case of municipality planning, with planned obsolescence baked in. Exacerbating this problem is the fact that once a developer leases a block and lot, they must fulfill benchmarks set by the local government because of a 5 year provincial political officer rotation where if it is not completed the officer won’t be promoted. Being pressed for time, project managers have to spit and glue the game plan, leaving many gaps in both the design and construction phases. In some instances developers will just build the skeleton and leave it up to the buyer to fit out the unit. More money is needed to complete it, so the buyer will take their time finishing since there is no property tax giving many buildings a ghost appearance.
Usually the developers have political ties to allow them to get out from underneath their catastrophic blunders (socialize the losses), and will let these properties sit vacant for years. On average a project takes seven years to finish on end until another developer comes along. Delaying completion of these projects keeps resources tied up and workers busy, especially during an economic downturn. Another reason is if these projects were to be completed too quickly, there would be a depreciation in prices. Deprecation in prices would be a massive blow to the social fabric of the new wealthy and cause some form of unrest, in addition to what’s been done to China’s economy post Covid-19. The overexposure in the real estate market through the third quarter of 2016, resulted in property related loans totaling 55 trillion RMB, accounting for about 25% of China’s banking assets.
A caveat to buying a unit inside a condominium in China is little to no offering plan or bylaws. The developer sells off units one by one (the quicker the better) while still retaining power as property manager and exclusive seller. As time goes by and the sponsor is no longer the majority stakeholder, he suddenly disappears as the building begins to fall apart. Who is maintaining the hallways? Who’s responsible for the leak in the lobby? Why is no one in the site office? What happened to the sink fund monies?
Eventually those who invested are left holding slabs of very expensive concrete and the unit’s sponsor is long gone. Yet still the overriding majority of condominium units globally are investment vehicles and not actually lived in. New money investors do little due diligence, which only perpetuates these types of problems. Sometimes people invest in a development that hasn’t even had the foundation poured yet. Many are never completed or require more than the initial investment. This is common in Southeast Asia due to graft in local city politics.
Are Ghost Cities just a temporary phenomenon? It’s been 7 and half years since 60 minutes first aired video footage of Zhengdong and a decade since the Daily Mail first reported on Kangbashi. There are some success stories in China about them, but the sheer magnitude of how many have been built in such a short period at the expense of its citizens speaks volumes on how things get done in China. Millions have been displaced and countries that have received direct investment from them have copied the “pour concrete and send in the troops” model on removing people. What is temporary is Chinese culture as peasants now possess western style clothing and goods (Nikes, Monte Blanc, Apple phones). A sign of a country undergoing globalization is the inability to decipher people who are financially well off versus the dregs of society. The more urban a society becomes the more easy it is to control so, eventually the peasants will occupy these cities.
The long term outlook has noticeable blind spots for black swans like tariffs, pandemics, wars and now the lack of arable land. What we should admire is what China has been able to accomplish in the short span of 20 years, which includes blowing up mountains and creating artificial islands just to build cities. They are out to prove the world and if there is one thing I’ve taken away from Chinese culture is their ability to hold grudges and how determined they can be to get something done.
On The Home Front, The EB5 and Cooperation
Donald Trump has demanded a weaker US dollar. A weaker US dollar means a better deal for Chinese buyers. The United States government will throw the kitchen sink at buoying up the housing market. As of 2018, spending on housing services was about $2.6 trillion, accounting for 11.6% of GDP. Taken together, spending within the housing market accounted for almost 15% of GDP in 2018.
With the EB5 program, China has established a beachfront in the United States to influence local politics through property ownership. Between 2012 and 2018, 80 percent of the nearly 10,000 EB-5 visas available each year went to Chinese-born investors. Usually once someone receives this visa they are able to bring their family over. Only two months after new rules took effect, Lindsey Graham and Chuck Schumer co-sponsored a bill meant to combat fraud in the midst of the Covid-19 and economic lockdown, thus revising Graham’s Immigration Investor Relief Act, which failed last November.
Graham and Schumer’s bill would lower the minimum amount that foreign investors have to put into projects in order to receive a green card. It would also allow some investors to stay in the U.S. as they wait for their visas. The proposal would slash the minimum investment amount to $450,000 and would increase the visas offered each year from 10,000 to 75,000. There are many instances of Shady Deals surrounding the EB-5 visa, but this is just the tip of the iceberg. A good portion of these visa holders invest and gentrify transit-oriented development areas, displacing mostly the poor and blue collar families. Through various programs these real estate developers gain access to certain grants and tax breaks incentivizing them to build either rental complexes or super high end luxury condominiums. One way to grease the wheels to get buyers into these units is tax abatements stretching as far out as 15 years. A sweetheart deal, but to offset the loss in tax revenue is to dump it on the locals living in single family homes, which will strong-arm them into selling their houses due to feeling the tax crunch. Once they are displaced, the local municipality will now be able to rezone and recode to increase density with ideas such as selling off air rights. These formulas are the meat of Agenda 2030 (which mandates so-called “sustainable development”).
Long term landlords or unit-owners are generally unaware of what future taxes will be, and with mounting regulations on housing, there will be situations where you will be unable to sell your property without having to jump through hoops(too many violations, none climate change friendly boilers etc). Eventually small and medium national RIETS will be gobbled up by the multinationals.
New York City housing stock is composed mostly of cooperatives. One way Chinese buyers are able to circumnavigate housing cooperatives rules is by directly purchasing sponsor units, enabling them to become shareholders without ever having to be vetted. This, in turn, makes the sponsor units much more valuable by not having a financial background check,proof of employment,citizenship status and number of occupants. Understandably, the board wouldn’t protest a unit selling above market value as this increases the shares value to the cooperative.
Bankism and the great divide:
Real estate experts frequently bemoan low-inventory but do not discuss shadow inventory. Shadow inventory refers to houses and apartments that are considered occupied because they are owned but sit vacant because the owner doesn’t live there. In many cases the elusive owner is a foreign entity, or perhaps a bank, which is intentionally keeping the property off the market. That homeless shelters are full while luxury skyscrapers sit vacant is something you will notice if you were to walk a major city’s downtown core in the evening. Look up at these apartment buildings and you will see few of the units are lit. The property is bought and paid for, but nobody’s home.
Shadow inventory keeps housing prices astronomically high. Lenders keep foreclosed houses off market (in so-called “zombie houses”) in order to artificially suppress housing inventory, driving borrowers to borrow more. In addition, banks are reluctant to throw out people in foreclosure as this would free up housing stock (average 685 days to complete a foreclosure). But if housing prices are propped up and inventory low, local governments can pass assessment after assessment with ease, further sapping the middle class’s disposable income.
With the dry up in foreign capital, many finished projects around the United States have become ghost cities, just like in Mainland China. A perfect example is the rapid buildup of Long Island City in Queens County, New York, now a belch of ostentatious wealth. Once full of commercial businesses and warehouses catering to Manhattan’s needs, Long Island City has witnessed a dubious transformation in the past decade. Since the United States has outsourced, corporatized and over financed its plebs, mom & pop property owners have been bought out, and Long Island City has come to more closely resemble some megalopolis in Far Asia. Stroll through the area and you will be treated to the sight of empty showrooms displaying building models, posh coffee shops full of Chinese-born students attending the new Cornell Tech on Roosevelt Island, and the never ending noise of nearby construction. We can see that all capital cities globally are starting to resemble one another where buildings are streamlined with sleek cold glass facades for business cores and the Five for One model for residential areas. Cost cutting leads to a general blandness and cheap austetics with things like decorative bricks.
The units being offered for sale are clearly not meant for families, as there is simply no demand for two-bedroom apartments that are 950 square feet with a price tag of $1.5 million or a studio apartment under 400 square feet going for $680,000. Over the last decade, condo prices in NYC alone rose from $1.15 million to $3.77 million. The situation is no different in San Francisco or Miami. These apartments were clearly meant for the wealthy who don’t call anyplace home. These gargantuan monolithic structures are archipelagos built for the benefit of the neo liberal death machine’s foot soldiers.
Summon the Boomer:
As The American Sun recently asked, who on earth will buy McMansions priced at $2 million or more? The beaten down and weathered children of the boomers endured the crash of ’08 and are now facing the controlled demolition of the United States economy. Do fatuous, deracinated boomers, looking to cash in for retirement, care to whom they sell their overpriced, oversized houses? In many cases, unfortunately, it seems they do not. Nor does the transformation of their formerly hospitable neighborhoods into something foreign and foreboding seem to cause them much grief. The motto of many boomers is “I Gots Mine”.
Millenials did not have the capital to purchase homes after the 2008 crash because they were too busy going into debt to pay for a largely useless higher education (which of course in most cases was recommended to them by their clueless boomer parents), and to fill this void of empty properties were foreign buyers and small time LLC flippers.
Here is a bird’s eye view of the situation: a brownstone gets purchased in a bad part of a major city, either by a wealthy boomer or a Chinese investor. The purchaser takes out a renovation grant provided by the state and lies on the application, claiming it’s their primary residency or M.B.E(minority based enterprise). They then use the grant money to start creating makeshift partitions. They install bathrooms to adjoin each room and build an oversized common kitchen. Finally, this predatory investor rents out every makeshift room to a college student, transplant or illegal immigrant, all for the price of what a true 1 bedroom apartment would’ve rented for 10 years ago. Here we have gentrification of the most dubious sort. The Hong Kong model of living in cages has come to America, albeit with somewhat better aesthetics.
Covid-19 and Millennial NeoLiberal Serfdom
Chinese influence aside, the looming question is, of course, where is the Real Estate market going? Let’s take a look at some various REITs as of the end of the 2020 summer:
Alex & Baldwin, a major commercial and Industrial property owner in Hawaii, is down 45% YTD.
Avalon Bays, a notorious residential property owner, is down 25% YTD.
Diversified Healthcare Trust, which handles senior living and medical buildings is down 54% YTD. This segment of the market had been hurting even prior to governors shoving Covid-positive seniors into nursing homes. The silent generation and older boomers have been reluctant to jump into “55 and older” planned communities and rentals that have been built the past decade. This, in turn, cratered the financial fortunes of national developers who bank on the elderly being willing to leave their houses in the suburbs.
Empire Realty Trust, which owns an office building where one of the first Covid patients in New York City worked, is down 55% YTD. In addition to this tidbit of information, Empire Realty Trust sent memos to its lessees on how to work from home effectively! Why would one of the most powerful REITS in the world encourage its leaseholders to work from home? It is in my opinion that we may see a total transformation of these commercial spaces for a post industrial society and will be utilized by those who are on some form of governmental assistance.
On the mortgage front, ARMOUR Residential REIT, Inc., which invests in fixed rate, and adjustable rate residential mortgage backed securities, is down a full 40% YTD. FHA loans are taking a beating in delinquencies, but so are Freddie Mae, Freddie Mac, Ginnie Mae and VA’s loans. Will it be profitable for big institutions to rent out single family homes, as opposed to giving out mortgages? Innovation Homes is up 1% YTD and American Homes 4 Rent is up 12.5%, YTD and Front Yard Residential is down only 12% YTD. All 3 of these REITs are in the business of buying and renting out single family homes. So we can see that most segments in the Real Estate market are suffering, with the exception of RIETs purchasing detached housing.
Our transformation into a neoliberal feudalistic society appears to be going full steam. 2016 home ownership among people aged 25-34 has dropped from 45.4% in 2000 to 37.0 percent in 2016. All the while, the top 100 private landowners grew by nearly 50 percent between 2007 and 2017. In 2007 alone these landowners amassed the floor space of the entire region of New England. Banks for the past 100 years have been making trust after trust and are now at the auction steps out-bidding the Joneses.
As we merge further into the boutique subscription-based economy, the formerly standard 30 year mortgage plan will grow increasingly obsolete. Projections reveal that millennials will possess less than a quarter of the nation’s wealth by 2030. If that is the case, they will have to rely largely on boomer inheritance. Once they inherit their parents’ wealth, millennials will be past reproduction age and the idea of holding onto a 4 bedroom aging house will seem like a pipe dream. Strapped with debt, no retirement plan and only 1099 contract work, they will be inclined to sell the property to a REIT and rent a studio apartment or go steroid glamping to pursue the “minimalist”/” find yourself” lifestyle. It’s no secret that the goal of the “sustainable development” doctrine is to subvert property rights; thus, we may well witness the end of single family housing and the rise of “the estate,” a situation in which one large house will replace an entire suburban neighborhood. Those who once resided in single family homes will be nudged into dense transit corridors in 2nd and 3rd tier cities, and will eventually reoccupy larger capital “smart cities.”
Rumination (WHO’S ZOOMIN’ WHO?)
The only thing that still baffles me is the question of who ultimately stands to gain from this transformation. Will the U.S eventually extrapolate China of its wealth and deplete it of its best and brightest, via “brain draining” through the imposition of open borders, allowing fresh cash and bodies to flow into the U.S.
Or, conversely is China colonizing the United States by flirting with such think tanks, solicitors and taking advantage of blatant loopholes to buying America from underneath? Is the saber rattling rhetoric from POTUS meant to promote a decoupling or is it to punish China for not integrating further with the neoliberal order? The situation has become quite fluid and it’s now comical to see urban planners turn schizophrenic, attempting to promote social distancing edicts whilst stacking and packing people as many as possible into the cities. The one thing I can say is the only losers in all of this are those treading water trying to get by while circling the drain both in America and China.