published Jul 26th 2016, 5:00 pm, by Lillian Chen and Jacob Gu

(Bloomberg) —
For David Wong, the business of selling homes isn’t as good this year as it was in 2015, and he’s blaming that on a decline in customers from China.

“The residential-property market here, especially for those priced between $2.5 million to $3 million, has been affected by China’s measures to control capital flight,” said the New York City-based Keller Williams Realty Landmark broker. “You need to cut the price, or it may take a real long time.”

Wong is not the only one who has felt the cooling in the U.S. real estate market for foreign buyers. Total sales to Chinese buyers in the 12 months through March fell for the first time since 2011, to $27.3 billion from $28.6 billion a year earlier, according to an annual research report released by the National Association of Realtors. The number of properties purchased by Chinese also declined to 29,195 units from 34,327 units.

While the total international sales saw its first decline in three years, the 1.25 percent pace is slower than 4.5 percent recorded for Chinese buying. In terms of U.S. dollar value, the total share of Chinese buying of international sales dropped from 27.5% to 26.7%.

“Some capital flow control measures have definitely affected the sales to Chinese buyers,” Lawrence Yun, chief economist for the Realtors group and lead author of the report, said in a phone interview.

Capital Controls

The yuan began plummeting in August, driving the Chinese currency to a five-year low versus the U.S. dollar. The Chinese authorities have been compelled to increasingly tighten the noose on cross-border capital flows to defend the yuan and to slow down the burnout of the nation’s foreign-exchange reserves since then. This includes increasing scrutiny of transfers overseas, to closely check whether individuals send money abroad by breaking up foreign-currency purchases into smaller transactions.

New measures were also introduced in December to crack down on illegal China UnionPay Co. card machines, which were suspected of being used to channel funds offshore via fake transactions. Meanwhile, illegal foreign-exchange transactions from underground banking were brought to regulators’ attention, as China busted the nation’s biggest underground bank, which handled $62 billion, according to a November report by the official People’s Daily.

China’s efforts, coupled with restrictions on companies’ foreign exchange business as well as curbing the offshore yuan liquidity to make currency shorting costlier, finally managed to work: China’s foreign reserve outflow has been mostly contained after climbing to a peak of $108 billion in December. The reserve resumed an increase in March and April.

Read Recent Capital Control Measures from China

How to get money out of China plays an important role for Chinese buyers in the U.S. property market.

“Many Chinese buyers are paying all cash in the U.S. because they neither have a credit history nor income proof here, making it impossible for them to obtain mortgages from banks,” Wong said.

Seventy-one percent of Chinese buyers in the U.S. real estate market paid completely with cash, the Realtors group said in its report. One-fifth secured mortgages from banks operating in the U.S. In comparison, only 7 percent of Indians paid all in cash, while 90 percent had financing from U.S. banks.

Devaluation

A slowing economy and the weaker yuan also played significant roles in suppressing the Chinese demand, said Yun.

The median price of existing-home sales in the United States increased by 6 percent in March 2016 from one year ago, but when measured in the Chinese currency, they were 10% more expensive, Yun estimated. They were costlier when it comes to California and New York, major destinations favored by the Chinese buyers, he said.

The Chinese currency depreciated 4 percent during the reporting period of the Realtor group’s research. The onshore yuan fell 2.92 percent against the U.S. dollar in the three months ended June 30, the biggest quarterly drop since 1994. The CFETS RMB Index fell to an all-time low of 94.25 on July 8, before rebounding slightly.

China’s economy expanded 6.9 percent in 2015, with 22 of the mainland’s 31 provinces decelerating from a year earlier as the nation’s growth slowed to the weakest pace in 25 years.

Chinese Dominance

While the buying spree from China has slowed somehow, “our report still shows the dominance of Chinese buyers compared with other international buyers, ” Yun said in the interview. “China is expanding by above 6 percent in its economy. It is not a spectacular growth but still far better than many other countries, and hence they have more millionaires to further support the U.S. property market. ”

Chinese ranked first among international buyers, spending three times as much as those from Canada, who came in second place, with $8.9 billion in acquisitions. Chinese buyers’ 26.7 percent share of international purchases surpassed the total share of the next four biggest countries of origin, Canada, India, Mexico and the U.K.

Chinese buyers tend to purchase more-expensive properties too, according to the Realtors group. Their average purchase price rose 12.6 percent from a year earlier to $936,615, while the average price for international buyers was $477,462. The median price paid by Chinese buyers gained 11.5 percent from a year earlier to $542,084.

“The increase of average price and median price indicate that those really wealthy people are still able to get their money out in some way,” Yun said. “Maybe they can bypass the capital control measures.”

“The Chinese buying profile is very unique and different from many other international buyers,” Yun said. “For example, the buying activities from Europe are more related to their financial capabilities — if the dollar strengthens, then fewer European buyers are expected. But the Chinese view is that U.S. property buying is more than investment, but some kind of safe-haven– it is a much safer diversification than just keeping everything in China.”