Dangers of investing in US realty sector

Updated: 2013-04-09 13:34

By Mei Xinyu (China Daily)

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The US federal government adopted an emergency management system for local governments in the 1970s when New York City was on the verge of bankruptcy. The same policy could have saved Detroit from collapsing. But the announcement of Michigan's white governor, Rick Snyder, that an emergency financial manager would virtually take over Detroit, which has been controlled by blacks for more than 40 years, has invited accusations full of racial undertones. The city council has openly called on its people to fight against the "takeover", claiming that the Michigan state government has violated local citizens' right to vote.

In other words, Detroit's decline can be attributed to racial tension.

If that is so, then the choice of Kevyn Orr, a black lawyer with a background in restructuring, as the most capable candidate for the job may not be good one either. And that is precisely the reason why overseas investors should not be rushing in to buy property in Detroit. After all, the city's socio-economic recovery has not even begun.

Given the lack of employment opportunities, youths are likely to be drawn to crime, which, together with the declining population trend of the past four decades, could push the city toward an even bleaker future. Under such circumstances, is investing in Detroit worth the trouble?

The decline in population is not unique to Detroit, for Buffalo in the US, Leipzig in Germany, and Liverpool and Manchester in the United Kingdom are witnessing a similar trend. Because of falling birth rates and the decline in their pillar industries, small and medium-sized cities and towns in many countries, especially the developed and industrializing ones, are losing their USP.

Many Japanese towns and villages are now home to mainly senior citizens. Kansas, and North and South Dakota have relatively few young and middle-aged people, and some cities in the US are even introducing policies to give land for free to retain working-age people. And in Europe, the drop in birth rate is shrinking the population and threatening the economic balance.

Because of these reasons, when the "one-dollar villas" news first hit the headlines a couple of years ago, I advised Chinese investors through an interview with the Los Angeles Times to be discreet about "bottom fishing" in the US property market. My message was that Chinese investors should not assume, on the basis of the continued rise in housing prices in China, that real estate investment in the US was a lucrative proposition.

Since urbanization in the US was completed decades ago, the urban real estate sector has ceased to be a pillar industry. Since people in the US more than anywhere else are likely to move to the outskirts of cities and villages in search for a better life, the American urban landscape is not likely to favor the realty sector in the long run.

Hopefully, Chinese investors will avoid the trap of investing in real estate in "to-be-ghost cities" in their quest to make profits.

The author is a researcher at the International Trade and Economic Cooperation Institute of the Ministry of Commerce.

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