Senior Reporter- San Francisco Business Times
This week’s headlines focused on market reaction to Fed Chairman Janet Yellen’s talk of raising interest rates next year, with less attention paid to the troubling news out of China, which could have an even bigger impact on the Bay Area’s hot housing market.
The stock market initially plunged nearly 200 points on Yellen’s remarks March 19, but took in stride China’s slowing retail sales, tighter credit and other signs of a softening economy.
Not that China’s woes were ignored entirely. On March 18, New York Times reporter Neil Gough wrote a story titled “China’s rapid growth hits the brakes.”
“New pockets of economic weakness in China emerged on (March 17), as the collapse of a highly indebted real estate developer and weak home sales pointed to a slowdown in the sprawling property sector,” Gough wrote.
His story notes this week’s default by a highly indebted Chinese developer and the default two weeks ago by solar-panel maker Shanghai Chaori Solar Energy Science and Technology Co., which marked the first default in China’s renminbi domestic bond market in recent history. Gough notes that it’s not unheard of for China’s real estate developers to encounter financial difficulties.
But as with the U.S. financial crisis that hit with full force in 2008, the weakest players are the first to succumb. You may recall that prompted some to initially describe the U.S. situation as a subprime crisis and Yellen’s predecessor Ben Bernanke to declare in May 2007 that the problem was contained.
Some see a situation similar to the U.S. financial crisis now unfolding in China, with that country’s soaring real estate prices and rapid growth of lending outside China’s traditional banking system.
China’s troubles bear watching because they could throw cold water on San Francisco’s hot real estate market. Just how hot the Bay Area market has become was reported this week in the San Francisco Business Times’ coverage of the city’s soaring condo prices. Another Business Times story focused on trophy office space commanding rents approaching $100 per square foot, a milestone last seen at other tops in the market in recent years.
Clearly, the Bay Area’s frothy real estate market is also enjoying a big lift from the gusher of cash flowing into technology startups and the subsequent wealth creation that was on full display this week with Airbnb reportedly hitting a $10 billion valuation, or more than the price being paid to take Safeway private.
Tom Perkins, speaking to the Commonwealth Club last month, said plenty to stir controversy. But one of his observations was on the money: the amount of capital flooding into the hands of Bay Area venture capitalists and entrepreneurs is being driven by the Fed’s low-interest-rate policy that pushes everyone to take more risk to generate the returns they need, whether that’s grandma or the managers of grandma’s pension fund.
The money coming into Bay Area real estate from China and other countries includes not only the widely publicized deals, but also the world’s wealthy quietly looking for safer places to stash cash.
As one real estate expert, commenting on rising condo prices in places like San Francisco and Miami, recently told Bloomberg TV, “We’ve become very good at building safe deposit boxes in the sky.”
Mark Calvey covers banking and finance for the San Francisco Business Times.