The rise of the Chinese consumer on the global stage has had a tremendous effect on world markets, shaking up everything from the price of milk powder to impressionist paintings. Now, the impact is being felt all the way in Palo Alto, the Silicon Valley town next to Stanford University.
Over the past two years, Chinese buyers have been snapping up property in the city, driving up prices and possibly contributing to an emerging bubble. Chinese nationals have tripled their share of home purchases in Palo Alto since 2011, now accounting for around 15 percent of transactions in the city according to Ken Deleon, founder of Deleon Realty, a local firm that has invested heavily in catering to Chinese buyers.
“If we have seven offers for a home here, three of them will be Mainland Chinese buyers with all cash,” Kim Heng, the Chinese-born head of Asian outreach at Deleon Realty, guessed. “We’ve never seen so much money in all the years we’ve been in the real estate business.”
Palo Alto, in many ways, is the ideal city for attracting Chinese buyers, due to its strength in three crucial areas: education, investment and immigration possibilities. Palo Alto’s public schools consistently rank among the best in the state, if not the country, and the city borders Stanford University, one of the American universities that is best-known in China. High—and rising— property values also make Palo Alto homes an attractive investment, especially for those now stymied by restrictions on multiple-home purchases in China. Finally, Palo Alto’s location in the heart of Silicon Valley, near companies like Google, Facebook and LinkedIn, offers enticing employment possibilities and, possibly, opportunities to obtain a green card. The prestige of the city—and the San Francisco Bay Area as a whole—isn’t lost on status-conscious Chinese consumers, either.
“With Stanford and all the venture capitalists nearby, the environment nurtures the entrepreneurial spirit,” said Kim Heng. “With that environment, Chinese people feel like the property values will never decrease.”
According to real estate tracker trulia.com, median home prices in Palo Alto have gone up 16.8 percent in the last 12 months, with the price per square foot jumping 23.4 percent in that time to $1,107. Local realtors have attributed that rise partly to the impact of Chinese buyers who are using cash to buy houses a continent away, often sight unseen.
Lan Liu Bowling, a Taiwanese-born broker in Palo Alto, has used her fluency in Mandarin to act as a conduit for these Chinese purchasers.
“I just sold a house yesterday where there were four people from China interested, and none of them had seen the house,” Bowling said. “There has been an impact on market values because they’re all coming with cash and they know that in order to beat the other four, you need to bid it up.”
Many Chinese buyers looking for homes in Palo Alto come from the elite of Chinese society, often serving in the leadership of the country’s largest corporations. Capital controls normally restrict the movement of large sums of RMB, China’s currency, out of the country, so prospective buyers use Hong Kong branches of their companies to transfer funds from the mainland to the territory and then into American accounts. Among those with access to these channels of wealth and power, the cost of the home is often the least of their concerns when buying into Palo Alto, where average prices approach $2 million.
“I am so shocked at the amount of money these people have,” Bowling remarked. “To me $3 million is a lot of money, but to them it’s almost like pocket change. It just doesn’t put any kind of financial burden on them.”
For many Chinese buyers, China’s political situation represents another reason to purchase homes abroad. The assets of wealthy Chinese people rest on shaky foundations: a change in the balance of power or an untimely corruption crackdown could spell disaster. According to Patrick Chovanec, Chief Strategist at Silvercrest Asset Management and former professor at Tsinghua University, these vulnerabilities have been driving wealthy Chinese to invest abroad.
“Wealthier people in China have a sense of political insecurity, that if you get on the rich lists or attract too much attention bad things can happen to you,” Chovanec explained. “So why not take at least some of their money and put it overseas? If the winds change, or if there is ever a crackdown, at least you won’t be poor.”
California’s role as a refuge for corrupt officials came into the spotlight this month, when a government official from Zhejiang Province was found to have fled to Orange County, where he had purchased seven luxury homes with one-off cash payments. Palo Alto realtors report that many of their clients will seek green cards for their wife and child, but not for themselves, fearing the financial scrutiny that may follow.
During a recent home-buying tour in the neighboring town of Menlo Park, a group of Chinese and Taiwanese buyers marveled at the luxurious backyard of a home priced at just under $2 million.
“It’s such a beautiful place. Why didn’t Bo Xilai come here to buy his villa?” one Taiwanese buyer joked to laughter from the group, referring to the use of a French villa as evidence at the trial of the disgraced Communist Party official.
But the surge in Chinese home purchases in the area represents more than just an exit strategy for wealthy Chinese: It is also one more leak in a Chinese financial system designed to keep money in the country. Capital controls, a fixed interest rate, and a restrictive banking system create what economists call “financial repression.” By limiting the potential deposit and investment options for Chinese citizens, the government ensures that the savings of the Chinese public are funneled into state-controlled banks that make cheap loans to favored borrowers: state-owned enterprises and local government finance vehicles. Money that doesn’t flow directly into the banks is often invested in domestic real estate, fueling what many observers call a massive Chinese property bubble.
When wealthy Chinese circumvent capital controls by moving their money through Hong Kong into overseas real estate, they are opting out of the Chinese system and letting steam out of financially repressed markets. But while the movement of funds remains small relative to the amount of liquidity in China, further leaks or the loosening of capital controls could spell major changes for Chinese asset markets.
“If money actually flows out of China, a lot of the bubble effect coming from all this capital trapped in China bidding up asset prices may go away,” Chovanec said. “If you have all this money chasing global investments, that would undercut the pumped up valuations in the system.”
Chovanec cautions that the recent surge in real estate investment is “a drop in the bucket” compared to a true loosening of capital controls. But given the central role the rich play in bidding up Chinese home prices, more activity in overseas real estate could cool the country’s red-hot housing markets. As the channels for, and savviness with, overseas investment grow, domestic property markets will lose their captive audience of investors.
But while this flow of funds may work to deflate Chinese property valuations, it may also help contribute to skyrocketing prices in the Bay Area. With prices rising rapidly throughout the region, analysts have pointed to the abundance of all-cash offers as culprit in an emerging bubble; cash buyers aren’t constrained by the evaluation of lenders when bidding up the price of a house. But that process can become a positive feedback loop, as investors’ own actions reinforce their beliefs about the ever-rising value of assets. For Chinese buyers accustomed to rising real estate prices in their home country, properties in Palo Alto fit the conceptual mold of a sure-thing investment.
Many of Lan Bowling’s Chinese clients look to Palo Alto real estate as a safe haven, but the very presence of mainland buyers can complicate predictions about prices.
“My clients want to see the value in the purchase,” Lan said. “But right now how do we determine the real value when the market is so hot?”