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Real Estate Expert Says China Cash Is Driving Soaring San Francisco House Prices

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SAN FRANCISCO (KPIX) — More and more, home buyers are bringing a once-rare tactic to the negotiation — all-cash offers. And, in the San Francisco Bay Area, a lot of those buyers are coming from China.

Phil Matier spoke with Mark McLaughlin, CEO of prominent San Francisco real estate firm Pacific Union International Inc. Here is an edited transcript of their conversation, recorded at KPIX studios Sunday, June 1, 2014.

PHIL MATIER: What have we got going on here with these cash sales? They’re phenomenal, up in excess of a million, two million dollars.

MARK McLAUGHLIN: Yeah, it’s a phenomenon that’s very active in the marketplace. Some of it is being driven by the liquidity in the Silicon Valley and the city of San Francisco but also, at Pacific Union, we’re seeing a large influx of foreign capital — particularly coming from China.

MATIER: What is driving the capital here … what’s [causing] people from China to invest this kind of money in San Francisco?

McLAUGHLIN: I think we’re seeing three different phenomena. One is asset diversification, people trying to move money out of China. Two would be education for their families. And three would be lifestyle, this is a beautiful place to live.

MATIER: Are they actually living here or are they just buying houses here the way we might be puttting money in a safety deposit box — it would be safe here, it’s free from any government moves in China and the value would be appreciating?

McLAUGHLIN: It’s difficult to generalize on that but I’d say that probably fifty percent of them are living here. Whether they’re living here to get their education or whether they’re living here for a change in lifestyle.

MATIER: And they’re able to amass this much cash in China, get it to Hong Kong and get it to San Francisco before [other] people can get their loan papers in?

McLAUGHLIN: Well, yeah. A lot of all-cash. We’ve seen tremendous wealth created in China in the last 20 years through the diversification of their government into private industry. At Pacific Union we’re seeing an awful lot of that capital generated put into [the] purchase [of] homes here in the San Francisco Bay Area.

MATIER: And how has it affected the market?

McLAUGHLIN: Well, in certain areas like Silicon Valley — Palo Alto, Menlo Park and the city of San Francisco — it’s added a demographic of buyers who, generally, take a long-term view. They’re not sellers in the next five to seven years. So it is going to drive housing prices up.

MATIER: In the short run, are these people overbidding what other people might be able to do? Are they the ones coming in two-, three-, four hundred thousand over asking [prices]?

McLAUGHLIN: The marketplace in the San Francisco Bay Area is limited in its supply and the demand is ferocious. We’ve got a fantastic job market so it’s not specifically driven by foreign capital. It’s driven by [the fact that this is] a very desirable place to live.

MATIER: What is it they’re looking for in housing in San Francisco, is it condos, apartments, houses?

McLAUGHLIN: If you’re coming as a foreign investor, what Pacific Union is seeing is the condo is very attractive because it’s low maintenance. There’s no yard to clean. Down in the Menlo Park/Palo Alto area you’re seeing single-family homes where that’s the prominent housing stock.

MATIER: Are these families moving here? Or are they sending their kids here? Who’s actually moving into these houses?

McLAUGHLIN: Some of them are already here. Some of them are here and educating children. Some of them are here and changing lifestyles, starting businesses. So, again it’s hard to generalize but it’s the predominance of the capital coming from China that we’re noticing.

MATIER: I hear from people that were putting together an offer for a house and before they could even do it somebody walked in with the cash. What effect does that have on the market?

McLAUGHLIN: Well, the preemptive offer is something that is very frustrating for buyers and it’s very difficult for us to council, at Pacific Union, someone as to how do you get the home that you want. Demand has just completely outstripped supply of inventory in many of our markets.

MATIER: So is there any advice you can give…?

McLAUGHLIN: Get your financing prepared very early. Be prequalified and be ready.

MATIER: Is this a bubble… that could burst and housing prices drop again?

McLAUGHLIN: I don’t think so Phil. I think that the dynamics of the San Francisco Bay Area are very, very solid. Our job market is solid. This is not a bubble. If anything I think prices in the San Francisco Bay Area are going to meet the world stage. Price per square foot of London, Hong Kong, Tokyo, Beijing and New York are probably thirty to forty percent higher than they are in the San Francisco Bay Area.

MATIER: Is this going to lead to more people getting priced out of this area?

McLAUGHLIN: There’s an awful lot of demand for the pricing in the area. So if you want to diversify and move up to some of our northern counties or some of our eastern counties …

MATIER: So your answer to that is a short, ‘yes.’ You might be commuting in from Redding in the next several years.

McLAUGHLIN: It is definitely more competitive to be living in the core of the San Francisco area.

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