There’s no lack of opinions on what’s happening to China’s real estate market. Most of these opinions are available on the web and when repeated often enough, become accepted as fact. But there do seem to be some real facts about the China’s real estate market: 

  • Home prices in China’s major cities have had double digit increases over the past year 
  • New home prices are way beyond the reach of the average Chinese household. It now takes over 20 years of income to buy an apartment in either Beijing or Shanghai. 
  • Government controls have so far proven to be ineffective in controlling price increases and probably have pushed prices even higher 
  • Most Chinese home buyers expect prices to continue to increase and are buying largely in fear of missing out 
  • Home ownership restrictions in China and limited alternative investment opportunities in China have resulted in Chinese buyers putting upward pressure on many global real estate markets. A report by CBRE forecasts mainland individuals will put up to 1.1 trillion yuan ($179 billion) into global real estate markets.

Chinese Offshore Buying – money knows no boundaries

In 2012, Chinese buyers accounted for 18% of the $68.2 billion that foreigners spent on homes in the U.S. But more recent reports indicate that Chinese enthusiasm for U.S. properties is cooling as the housing market recovers and prices increase. How many bought in Vancouver? Who knows? The combination of restrictions on second home purchases in China, the increasing value of the yuan, and more affordable prices in other countries has lead the wealthiest mainland Chinese to look overseas to invest in second and third homes. A new survey from China property experts at Juwai, in Shanghai show a third of home buyers looking outside China for housing. The U.S. is their top choice.

Chinese buyers spent $28.7 billion on overseas residential property in 2011, and the Global Chinese Real Estate Congress projected sales to reach $50 billion by 2012 or 2013. According to Juwai, nearby Australia has witnessed 840% growth in Chinese buyers over the last three years, and the U.K. has experienced over 500% growth. The U.S., France, Malaysia, Cyprus, Costa Rica and New Zealand are each experiencing a new wave of buyers.

Some countries, such as Australia has set up investment rules to restrict to limit foreign buying. Foreigners are only allowed to buy new homes and in the case of apartment condominiums, only 50% of the units in a building. Is it working? Probably not. According to reports from Australian realtors, Chinese migrants are helping friends and family in China to skirt Australia’s foreign investment rules by purchasing established homes on their behalf. The official figures based on National Australia Bank research reveals foreign buyers snapped up one in every eight new properties built this year – up from one in 20 properties in 2011. The real figures are likely much higher.

China’s Housing Bubble

What’s a housing bubble? In simplest terms a housing bubble occurs when housing becomes a commodity whose price is based on expectations of further price increases.

A recent report in Global Times sums up the situation in China quite well.

“There is growing evidence to suggest that a dangerous housing bubble is brewing within China’s economy. Recent research by a Japanese scholar shows that China’s urban land is now valued at a combined 265 trillion yuan ($43.3 trillion), roughly six times the country’s GDP last year. Under normal circumstances, land prices should not exceed GDP by more than a factor of two. And when Japan got hit by its own financial crisis, its land was worth four times GDP. Many have warned of the threat lurking just under the surface of China’s housing market. But none of the warnings have been taken seriously. By and large, Chinese “experts” deny the existence of a bubble altogether, saying the market has plenty of room to expand further. Meanwhile, the government still lacks the resolve to control land prices. In some cities, the property market accounts for over 80 percent of the local economy. Few are willing to face reality because everyone, in one way or another, is a stakeholder in the housing market. “

Some analysts think the collapse of China’s real estate market will start in Beijing. Official housing market figures are limited to prices in 70 major cities, so it’s difficult to gauge the true market situation. According to one market analyst, Niu Dao on his Sina web page, resale homes have flooded the market in Beijing and other major cities. Niu Doa states that ” there have been over ten thousand second-hand homes sales for two consecutive weeks in Beijing”. The number of second-hand houses on the market in the last two weeks almost surpassed total sales volume for April.

Is this is really a sign of the start of collapse in China’s real estate market? Maybe. Maybe not. The thing with real estate bubbles is that they go on much longer than expected. Many analyst were sure that the market would collapse in 2011. But when the market does collapse it happens much quicker than expected with much wailing and gnashing of teeth.

Implications for the Vancouver Condo Market

Everyone with even the slightest interest in the Vancouver housing market knows that Chinese buyers have bought a lot of property in the past five years. But how much is the big unknown. And whether or not Chinese buyers have been responsible for the increase in residential prices is open to debate.

But it’s now an accepted fact that housing in Greater Vancouver has been “globalized” and is basically a two tier market. Rich foreign buyers have carved out their niches in the more desirable residential areas such as Coal Harbour, Kitsilano, and British Properties and pushed prices beyond the reach of most local buyers. Price increases in these prime market areas has also resulted in price increases in most other markets, leaving locals priced out of the housing market.

So what’s new? There have always been prime areas favoured by the rich. What’s new this time is that Chinese off shore buyers are basically using their Vancouver real estate purchases as investments and leaving them empty until they can flip them for a higher price. But again, how many are bought and left vacant is subject to speculation. The government doesn’t seem interested in tracking this at all.

An analysis of housing starts in Metro Vancouver and net provincial migration suggest that this phenomenon of vacant second home purchases is real enough. Over the last 20 years, net migration to BC has been very closely associated with housing starts in Metro Vancouver. Until the economic/banking crises of 2008. After 2008, net migration has been on a steady decline but since 2010, CMHC figures show housing increasing annual housing starts. The first time there has been such a major diversion in trends in the past 20 years.

Sales of new apartment condos were good until the end of 2011 but since then figures from MPC Intelligence indicate that the number of unsold apartment condo units is now over 10,000 units or more than one year’s worth of sales. With more than 70% of new high rise project s that started marketing in the first half of 2013 targeting “immigrant buyers” Vancouver developers have become addicted to Chinese cash. If net migration to BC doesn’t pick up and unsold inventory continues to build, developers could be facing severe withdrawal symptoms in the near future.

So that’s the good news if the Chinese real estate bubble doesn’t burst and rich Chinese continue to buy. But if the Chinese real estate bubble does pop then things will get very interesting. It will definitely have a negative effect on the world economy and probably flatten many real estate markets around the world which have had heavy Chinese investments. You can kiss those reports of increased Chinese overseas real estate investments goodbye. If it’s anything like the aftermath of the Japanese real estate collapse, prices in Vancouver could drop significantly. But this shouldn’t be a source of joy to any of the “bubble-ists” who have been waiting for a major price adjustment. The economy will also take a hit leaving many unable to afford even reduced housing prices.