Chinese Buyers and the New Condo Market in Vancouver or Hey Man! Who Stole My Housing Market, Eh?

Thanks to the influx of wealthy Chinese buyers, the Vancouver housing market is quickly moving beyond the financial grasp of local buyers. While this may be making some real estate agents and some developers very happy and very rich, it doesn't bode well for the rest of us and neither does it bode well for those Chinese buyers paying top dollar for Vancouver real estate.

Chinese Buyers at Risk

Over the past few months, increasing media attention has been paid to the Chinese housing bubble. That there is a bubble is not in dispute. What is in question is whether it can be managed.

The first thing to recognize about buyers from the PRC is that they have not yet experienced the downside of a housing market. It's all been up and up for them. For these buyers, housing is a commodity whose prices have never come down. But that may soon change.

Many observers are of the opinion that the Chinese housing market is different (sound familiar) and that a US type housing melt-down is improbable. The supporting factors are that Chinese buyers are not highly leveraged, a huge demand for housing in China and strong central government control curbing speculation.

But what these observers may be missing is that Chinese real estate developers are highly leveraged and Chinese banks and local governments are heavily exposed to real estate investments. First quarter 2011 results from 113 Chinese real estate companies showed that profits dropped, inventories and debts increased to unprecedented levels. Compared to the previous year, inventories increased by 40% and total debt increased by 41%. With the Chinese government determined to cool the real estate market, there's likely to be trouble ahead for the weaker development companies over the coming year.

And what will happen to the Vancouver condo market if prices actually start to drop in mainland China? The Vancouver condo market experienced this sort of thing before with the Asian financial crises in 1997. Those with attention spans exceeding 30 seconds will remember that condo prices dropped by about 20%, buyers dropped out of the market and more than a few Vancouver developers went under. The market didn't fully recover until early 2002.

If the Chinese housing bubble does burst, Chinese buyers who have invested in Vancouver condos will likely liquidate to shore up assets at home. But because these buyers have pushed up prices beyond the reach of local buyers, there's no local market for their condos. Prices will have to drop significantly and that will mean heavy losses for both the Chinese investors and the developers catering to this market.

Developers at Risk

So how important is the Chinese buyer to the new condo market in Vancouver? According to MPC, which has been actively tracking the new condominium market in Metro Vancouver for more than five years, the new condo market is now primarily supported by Chinese buyer segments. All the recent new presale condominium success in Metro Vancouver can be directly attributed to the participation of the Chinese buyer. These buyers are the major and in some markets the only buyers in the following submarkets; Richmond, Burnaby, Vancouver Westside, Vancouver Eastside and Coquitlam. Chinese buyers are also beginning to drive sales in markets like Delta, South Surrey, Fleetwood, Guilford and even Langley.

The following table outlines the estimated percentage of new condos purchased by Chinese buyers in 2010 and year to date 2011, by product type and submarket. These estimated percentages are based on product launch attendance, sales staff interviews, site visits, target marketing and advertising as well as information provided by developers.

Estimated Percentage of New Home Units Consumed by Chinese Buyer Segments (2010/2011)
New Condo Type	Richmond	Burnaby	Vancouver Westside	Vancouver Eastside	Coquitlam
Concrete Condominiums	90% - 100%	85% - 95%	75% - 85%	75% - 85%	75% - 85%
Woodframe Condominiums	90% - 100%	75% - 85%	65% - 75%	65% - 75%	75% - 85%

MPC estimates that more than 75% of all presales recorded in these markets from 2009 to present are to Chinese buyer groups. Some developments, specifically, concrete projects in defined neighborhoods like Central Richmond, UBC and Metrotown have seen 99% to 100% Chinese buyer activity.

So what has been the net affect of this concentration of Chinese buyers on prices? In Westside Vancouver the average selling price of new high rise condos in April 2011 was $690,000 (excluding HST) ; up by just 3% from a year ago. But average selling price per square foot was $790; up by 13% from one year ago. In Burnaby average high rise prices in April were $452,000; little change from one year ago. But average price per square foot was also up by 13% to $563. Prices for Richmond high rise condos appear to be little changed from one year ago. This may be because of fairly high unsold inventories in new projects. Average selling price in April was $462,000 or $524 pr square foot.

While some may disagree, depending on their stake in the Chinese buyer segment, a housing market so highly dependent on one buyer type and so dependent on the future course of housing markets on the other side of the Pacific is not a good thing. Speculation on a basic necessity as housing places a huge burden on the rest of the society. Households priced out of a market will have to increase their commute time to find affordable accommodation. The result is increased urban sprawl, increased pollution, increased taxes and a deteriorating quality of life. Time for a 100% capital gains tax on housing speculators?