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Chinese Investment Props Up US Real Estate Market

3p is proud to partner with the Presidio Graduate School’s Macroeconomics course on a blogging series about “the economics of sustainability.” This post is part of that series. To follow along, please click here. By Jiale Zhao  Recently, the news reported a prosperous real estate market in Silicon Valley in the area around Millbrae, Palo Alto and Cupertino. Investments in homes over $300,000 coming from Asia, especially from China, increased significantly during 2011. There are also travel agents taking this opportunity to organize large expensive trips, charging lots of money for Chinese people to come to the U.S. to see houses. It is not new that some ultra-rich Chinese invest in US in exchange for EB-5 visa status, obtainable through an immigration investment program that targets regional centers in US. These visas are only available to business owners who provide at least  ten jobs. However, the amount of investment in both commercial and residential real estate since last year has increased dramatically, and this is not just due to EB-5 hopefuls. Investment benefits differ from EB-5 benefits in that you can’t change your immigration status by only investing in real estate, as this will not generate any job.  Where does the motivation to buy houses in U.S. come from? 1.Currency exchange rate The Yuan’s exchange rate against the dollar has appreciated 4.92 percent in just one year. Since one Yuan can buy more dollars, Chinese are encouraged to buy houses in US regardless of whether it is for a personal residence or as a rental property investment. 2. Inflation in China With growing inflation in China, people are choosing to keep less cash on hand, so they are inclined to make investments. However, real estate prices in China are reaching prohibitive levels. Moreover the stock market volatility is a barrier to entry even for successful investors. One of the only ways to invest is to take advantage of the US economic downturn in real estate market. 3. Strong expectations for US real estate Since real estate prices in US have declined dramatically, there are expectations that when the US economy bounces back, real estate prices will go up too. This creates more confidence for investors. 4. Other considerations One more reason that so many Chinese buy houses in the US is for the next generation. Because of the advanced education system in the US, many Chinese want to send their children to study here. Rather than paying rent, they could use their own houses, and/or rent their houses at equivalent value or more so as to reduce costs for their children. Additionally, some consider using real estate for business purposes, either as a place to stay while on business trips or to rent for a profit. What does this mean for the US economy? The foreign investment is welcome, as it creates higher demand for American real estate and will help boost the US economy and the value of the dollar. In fact, there is a measure in the US Senate now proposing aggressive policies which would ease immigration restrictions for those who buy real estate over $1 million, with the hope of attracting more investors. In addition, such a measure would help to decrease the real estate holdings of big banks and make those assets turn into loanable funds. How does the Chinese government feel about this? There are two sides to every coin. On one side, this practice could diversify dollar-denominated assets in China, since the Chinese government has a large amount of dollar reserves. On the flip side, there would be more wealth flowing to US as well as educated or intelligent people immigrating to the US. It could also have a backlash effect on Chinese real estate. How will the Chinese government leverage this practice? It is difficult to say. [Image credit: Mundoo, Flickr] Jiale Zhao is a Chinese girl and international student in the US. She has a bachelor's degree in Chemical material engineering, and worked three years in south of China as a technician and sales supervisor in a fabric company.

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