China's Real Estate Bubble and the Vancouver Condo Market



Over the last six months an increasing amount of media attention has been turned to the impending implosion of China's real estate bubble. There's little doubt that this bubble exists but opinion is still divided as to the possible consequences what will happen when this bubble bursts.

Most China experts agree that there will be a price correction (WPC) but that it will be manageable citing the ability of Beijing to sort out any problems. However, this may be wishful thinking given the enormity of regaining control of the housing market.

Given the importance of property transfers and leases to local government revenue there is little incentive to cut back on development for local governments. According to a report by World Property Channel some local governments have actually cut out private developers and set up their own real estate development firms, run by themselves or in cooperation with other state-owned companies.

Housing prices in China have been increasing at double digit rates and while there is tremendous demand for affordable housing, what is being built is not affordable. Nationally , home prices are 10 times the median household income and in Beijing the ratio is closer to 22 times. (WPC)

The net effect of all the forces promoting the construction of more housing is a huge overcapacity in unaffordable product. Some estimates report as many as 64 million empty apartments in China    (China's Ghost Cities). Entire cities stand empty as more continue to be built. Add to this the increasing evidence that the Chinese economy is poised for slowdown, it becomes increasing likely that China's speculation in real estate is driven by the "greater fool theory".   (Slowing China)

So what does this have to do with the Vancouver condo market? Plenty, actually. China has clamped down on second home ownership by raising equity requirements and limiting purchases in Beijing. As a result, wealthy Chinese investors/speculators have turned their attention to overseas markets. Fully 30 percent of Chinese home buyers are looking away from their own domestic market and Vancouver is getting a lot of attention. Chinese Overseas Investors

Judging from anecdotal evidence and an analysis of condo price trends, many Mainland Chinese buyers are concentrating on high rise product in Westside Vancouver and Downtown Vancouver. Some realtors estimate that Mainland Chinese make up 80% of Westside sales. The effect of wealthy Chinese buyers on prices in very noticeable. The average MLS selling price for Westside high rise condos in the first quarter of 2011 was $792,000; up by 11% from the previous year. For the same period, average MLS prices for downtown high rise condos were $683,000; a 14% increase over the previous year.

So what's wrong with that. Realtors are very happy. Sellers are very happy. But local buyers are out of luck. According to Census figures, the average before-tax household income in Vancouver in 2005 was $68,000. Assuming an annual 4% increase, average household income in 2011 should be close to $86,000. This results in an average price to income ratio of 9.2 for Westside high rise condos and a ratio of 7.9 for Downtown high rise condos. This put local buyers wanting to own a high rise condo in these markets on par with the average Chinese household. The average price to income ratio in most other Greater Vancouver high rise markets ranges from 2.6 to 5.0.




And what will happen when the Chinese property bubble goes kaplooey? A best guess is that Westside and Downtown high rise prices will go down. And by how much?



In 2008, the Vancouver condo market felt the effects of the latest economic crises. Something that many development experts thought would never happen here. Westside MLS high rise prices plummeted by 36% over a six month period. And then recovered over the next 24 months.




A comparison of the price distribution of Westside MLS high rise sales at the height of the market in 2008 and the bottom of the market at the end of 2008 shows that the top half of the market essentially disappeared. At the beginning of 2008 over half the sales were priced over $650,000. At the end of 2008, only about 15% of sales were over $650,000. During the first quarter of 2011, the price distribution of MLS high rise sales was again similar to the beginning of 2008.

When the Chinese property bubble pops and that will probably be before 2015, Westside and Downtown high rise prices are likely to experience a similar drop. But chances are that the drop will be deeper and more prolonged. And the effects will be more wide spread than the 2008 "price correction". The only good news coming out of a collapse of the Chinese property market will be that local Vancouver buyers may be able to buy high rise condos at half price.

Three of the best recent reports on China's Economy and Real Estate Bubble are: