Will it be a hard or soft landing for Seattles real estate market?
Will it be a hard or soft landing for Seattle's real estate market? Charles Mudede

On September 8, Seattle-based technology news website GeekWire asked the question: "Is Amazon responsible for Seattle’s housing cooldown?" And received mostly vague answers from a number of local real estate agents. What is not certain: Is Amazon's hiring slowdown cooling the housing market, which is already vastly overvalued? What is certain: Houses are taking longer to sell in King Country, though Seattle's housing inventory is still tight. In the piece, no one mentioned China, which, until very recently, directed massive amounts of capital to the local market. But by April this year, it was clear that the volume of this flow was shrinking. Marc Stiles of Puget Sound Business Journal reported: "For the first time in years, those interested in buying real estate in the Puget Sound region won’t have to worry about competition from Chinese buyers nearly as much."

On the Boards presents NW New Works 2019, a festival of the boldest new performance in the PNW!

Housing values have either been flat or falling since that time. But what really happened? Why did Chinese investors exit a market with the kind of narrative (tech city) that can inflate values far beyond what they are today? The median price for a house in Seattle is around $700,000. It could easily rise to a million. That's the kind of story we have going for us, and the Chinese leave? Some blame the yuan's fall in value, but this explanation is insufficient for reasons relating to China's still very positive current account position. The main cause for the decline can instead be found in the recent capital restrictions imposed on Chinese investors and buyers by the Chinese government. Some of us wanted the local government to protect the Seattle-area market from the distorting effects of unregulated flows of global surplus capital, but it turned out that the Chinese government was way ahead of us in this regard. It actually imposed these restrictions on itself.

CNN Money reports:

For years, Chinese companies pumped growing amounts of money into the United States, deepening ties between the countries.

But Chinese investment totaled only $1.8 billion between January and May. That's a 92% drop compared to the same period in 2017, and the lowest level in seven years, according to a report released Wednesday by Rhodium Group, a research firm that tracks Chinese foreign investment...

China's restrictions on outbound investment... remains a factor.

About a year and a half ago, the country started imposing capital controls to stop its biggest conglomerates from overextending themselves. In 2017, Beijing said it would limit overseas investments by Chinese companies in industries like real estate, hotels and entertainment.

And so, the Seattle housing market is cooling, a fact that has received national attention, but maybe not enough. What's happening here could be a sign or the form that the next economic disaster will take in the near future. My reasoning is actually drawn from an impressive insight presented in a new important book called Crashed: How a Decade of Financial Crises Changed the World. It's by British-born historian Adam Tooze. It's longish (over 600 pages), and exhaustively examines the background of the crisis that started on Wall Street and rapidly spread to major capital markets around the world. I rank the work with Walter Bagehot's 1873 Lombard Street: A Description of the Money Market (it concerned the crash of 1866), and John Kenneth Galbraith's 1955 The Great Crash, 1929.

In the opening chapters Crashed's Part 1 ("Gathering Storm"), Tooze explains that many of the leading pre-crash policy makers in the US saw China's emerging economic power as the greatest threat not only to the US American economy, but its geo-political hegemony, which had (and still has) the dollar (the world's currency) as its foundation and the primary support for its huge debts, massive borrowing, and current account deficits. But when the smoke cleared from the crash of 2008, China turned out not to be the culprit (or co-culprit). It was instead Europe. Everyone was talking about China and completely ignoring Europe, whose banks were daily moving huge volumes of borrowed capital to and from the US. This is why the Federal Reserve did not bail out China. It bailed out Europe, almost as much as it bailed out US banks. This fact is rarely mentioned by the mainstream, states Tooze.

Before the crash, the world's financial transactions were mostly conducted between New York City's Wall Street and London's City. The crisis of 2008 caused by these financial capitals was resolved by reviving banks on both sides of the North Atlantic, which all saw the Federal Reserve as the lender of last resort. China, on the other hand, helped pull the world out of this trans-North Atlantic catastrophe by building like crazy and exporting surplus capital around the world. Seattle became one of the destinations for this capital, and (combined with other factors), its housing market boomed like never before. Billions entered Seattle and Bellevue from Shanghai and Hong Kong. The story of the tech city supplied the narrative support for the incredible inflation of home values.

At a time when much of this money has dried up, the Seattle-area market is cooling. It would be wise for us to read in this coincidence the future of the world economy. China's role in the crash of 2008 may not have been central, but we certainly cannot expect a repeat of that in the next crash. China's GDP was less than $4 trillion in 2008; 10 years later, it's over $11 trillion. It had a massive stock market crash in 2015 that required a $236 billion bailout from the government. It will not bail out the world.