Bloomberg recently published a chart highlighting the relationship between Vancouver real estate and China's economy, suggesting that what happens in China has as much influence on the city's housing market as Canada's own economic policies.
Bloomberg pointed out that China's gross domestic product expanded by an annual rate of 7.9 per cent in the fourth quarter of 2012 — up from 7.4 per cent in the prior quarter and the economy's first acceleration in two years.
Their graph established a direct correlation between China's GDP and Vancouver's housing prices — as China's GDP rose, so did Vancouver's real estate prices. If the trend holds, Bloomberg predicts, Vancouver's real estate prices should also soon rise.
Correlation isn't causation — and Vancouver's real estate market is certainly complex — but the Bloomberg research supports my prediction that Chinese buyers will be back to Vancouver real estate sooner rather than later.
Some background: Over the past year, mainland Chinese investor buyers all but disappeared from Vancouver's real estate marketplace, contributing to what was already a softening market in metro Vancouver.
But why did Chinese investors disappear in the first place? During the first decade of the new millennium, real estate prices in China were astronomic — even more expensive than Vancouver. In 2009, China introduced a policy designed to cool investor speculation in real estate. This policy, which was meant to help ordinary citizens buy their own home, stipulated that buyers could purchase their first home with 30 per cent cash down, but if they bought a second property, a whopping 60 per cent down payment is required. As a result of the policy, prices in major cities such as Beijing dropped by 30 to 40 per cent, effectively halting the investor market in the country.
What the policy did was greatly reduce the amount of cash investors had to invest in real estate, both in China and overseas.
Typically, Chinese New Year is when Chinese investors visit Vancouver and go on a shopping spree, but last year, Vancouver real-estate developers and marketers noticed the absence of the mainland Chinese buyer, a telltale sign that China's policy was working and that the overall economy was slowing down.
Here's why I think Chinese investors will return. In China, the real-estate industry accounts for 11 per cent of the country's overall GDP. Including related industries like appliances and furniture, you're looking at a hefty 22 to 25 per cent of the country's GDP. The People's Republic of China simply cannot afford to have this important industry stall, which is why I believe that the Chinese government will relax the restrictive lending policies, investors will start getting back into the market and, as their assets become more liquid, we'll see them return to Vancouver.
The brisk return of China's real-estate market means many Chinese will once again look for a safe haven to park their newly regained wealth.
While China's policy change has impacted investors' cash flow in the short term, it hasn't curbed their enthusiasm for Vancouver real estate. The sudden rise and fall in real estate prices that we're seeing now in China, as well as fluctuations in the overall economy, mean that people view investing there as no less risky than placing bets on a baccarat table. For many Chinese investors, parking money in Vancouver feels as safe as investing in treasury bills.
The People's Republic of China has a new leader in Xi Jinping and historically every change in leadership brings with it new policies to create its own legacy. I believe that with this leadership change, we will see major changes in the country's mortgage-lending policies and a renewed interest in real estate investing.
Experts predict that Vancouver's real estate market in 2013 will decline slightly, not crash. And with the likely return of the Chinese investor and the news that the Bank of Canada will hold the interest rate at one per cent, the future of Vancouver's real estate may not be as bad as what the headlines would have you believe.
A version of this article first appeared in B.C. Business.
Follow Will Lin on Twitter: www.twitter.com/RizeAlliance
The USA real estate market crashed in 2006 and six years later, has not even remotely recovered to peak prices. Ireland and Spain are two other crash examples that come to mind.
Tiny Japan's real estate market has not recovered in over twenty one years.
In Tokyo, population 12 million, on a mountainous island surrounded by ocean, (sound familar?) houses are worth about a quarter of what they sold for in 1991.
Have you read about France's real estate market over the past year? Please do.
All of these countries were overpriced, and nobody in real estate would admit that a fall could or would happen. But it did. The reason is that houses, over the long run, always appreciate at about the inflation rate. Think about it. If they didn't, none of us would be able to afford houses by now.
In Vancouver, the myth that retirees and Chinese will wait in line to pay an ever higher price for your abode is still trotted by realtors and developers. But the runup in Canadian house prices over the last ten years has far outrun inflation. The housing market is ripe for a protracted correction.
It will happen.
Well now I'm confused. In all the blabber about affordability of housing - or lack of it - in Vancouver for ordinary Canadians, there was much speculation (pun intended) that real estate prices were being driven out of sight by non-resident Chinese investors. 'Not so!' swore the real estate developers and agents. Even though they claimed that there was no way of knowing, they themselves actually DID know what there was no way of knowing, which was that only one or two relatively well-off elderly Chinese investors had ever bought so much as a tiny condo in Vancouver in the past twenty years.
Are you now suggesting this was NOT the case, Mr Lin? Perhaps if you have more accurate information, you could share it with curious Vancouverites such as myself. For example, based on sales, exactly how much of our residential real estate is currently owned by non-resident Chinese investors, and how does that compare to one or two or three years ago?
Learn the difference between statements of actual fact and those merely of persuassion. This bloke is a developer.
But hey, here I am comparing Vancouver with New York and Paris; someone must've spiked my drink with the same thing you're having.
Vancouver real-estate is completely over-inflated. It will crash hard. It's just a matter of time. Furthermore, overseas Chinese investments only account for a small fraction of Vancouver's real estate market.
Why can't we encourage investment by people who have a stake in enriching and growing our city as a community? Am I the only one who thinks there is something wrong with allowing foreign investors with to park their money here as though it were a bank vault?
Am I naive to envision a system where our city's economic interests are balanced to a greater extent with our interests as citizens?