Here at VREAA we have always been of the opinion that the impact of wealthy Chinese buyers on Vancouver RE prices has been more indirect than direct. By that we mean that local speculators have been the major leveraged purchasers of our RE, and the ‘wealthy foreign buyer’ story has fueled these local gamblers. After all, foreign buyers are responsible for less than 5% of local purchases. However, having said that, we do know the anecdotes of wealthy Chinese families flying into Vancouver for the weekend, and, while here, purchasing multi-million dollar condos or SFHs on the Westside. And we were impressed, very impressed actually, by the way in which the beginning of what-would-have-been-our-crash (the price drops in 2008) followed quite remarkably the topping and dropping of the Shanghai index. Of course, we were bailed out by the free money that followed the fall 2008 crash of world markets, and we’re now back at those 2008 highs. So, here is the question: Is the coming crash in Vancouver RE going to coincide with the coming crash in Chinese RE? As grist for the mill, we give you two charts, and a generous excerpt from today’s ‘Barron’s’. “Surging credit has revived the animal spirits of Chinese investors”; “The property market looms so large in the Chinese economy”; “Housing has become a national obsession.” Ring any bells? -vreaa. [Update 28 Mar 2010 – For the record, this does not mean that we think that a RE crash in China is necessary for a serious collapse in Vancouver RE prices to occur.]
From Alan Abelson’s column ‘Red Flags Over China’, Barron’s, 29 Mar 2010. He cites the work of one of our favourite bubble-ologists, Edward Chancellor, author of ‘Devil Take The Hindmost’ –
“We’ve come across a recent piece by Edward Chancellor entitled “China’s Red Flags”. It contends “China today exhibits many of the characteristics of great speculative manias” over the past three centuries and then outlines those characteristics.
Such debacles usually start, Edward has found, with a compelling growth story. Another feature is a blind faith in the competence of the authorities. The ignominious list includes: excessive capital investment; a surge in corruption; easy money; fixed- currency regimes; rampant credit growth; moral hazard; precarious financial structures; and rapidly rising property prices powered by dodgy loans.
Of these, rapid credit growth is the most important leading indicator of financial instability, followed by an asset price bubble. Low interest rates and strong money growth play a significant part, too, in creating memorably bad outcomes. China, unhappily, has its share of these dubious qualities as well as being inflicted by a huge speculative mania.
Edward points out that “forecasts for urbanization and economic growth make for a compelling Wall Street pitch.” But he cautions that like the extravagant expectations for Internet growth during the dot-com mania, investors seem to be swallowing whole China’s growth forecasts. A good example is the reckoning that the urban population will increase some 350 million by 2025.
Edward suggests those numbers may not accurately reflect the present density of urban areas in China because a) many rural migrants to the cities tend not to be included in the official count as they lack residency status; and b) officials are rewarded on GDP growth per capita in their districts, so they have an obvious interest in understating how many people those districts contain.
He also notes that “Wall Street tends to downplay the darker aspects of the Chinese demographic story.” China’s population is set to decline in 2015 and the worker participation rate will peak this year. That will cause a sharp shrinkage in the number of people who migrate to the cities and supply China with its seemingly inexhaustible reservoir of cheap labor, key to its spectacular export success.
In recent years, no secret, Beijing has built up a vast treasury of foreign reserves of some $2.4 trillion. But Edward believes it’s a mistake to think that China’s gargantuan foreign-exchange reserves render its economy invincible. “These reserves,” he acknowledges, “can be used to buy foreign assets, pay for imports or defend a currency under attack.” But they aren’t especially effective in wrestling with the problems that follow, say, the collapse of an asset-price bubble, such as a broken banking system or a legacy of bad investments.
And, on that score, he quotes approvingly the observation in a recent book on China that “the only two countries which have previously accumulated such large foreign-exchange reserves relative to global GDP were the U.S. in 1929 and Japan in 1989.”
While surging credit has “revived the animal spirits of Chinese investors” and hugely whetted their appetites for all manner of stocks, including initial public offerings, quick trades and other classic signs of speculative euphoria, the real action has been in “China’s overheating property market.” And a goodly number of Edward’s red flags are “fluttering around” over-stretched real-estate valuations, rampant speculation and frenzied new construction. Housing, he says, “has become a national obsession.”
Pinpointing when the real-estate bubble will burst is a bit tricky, Edward concedes, in part because China is “not a pure market economy. State-owned enterprises can be called upon to prop up markets. Losses may be concealed or shuffled around like a shell game…Such measures, however, won’t cure China’s problems. They only delay the denouement.”
And he cautions that “just because the timing of any future crisis is imponderable, doesn’t mean the risk posed by the real- estate bubble should be ignored.” All the more so because the property market looms so large in the Chinese economy and financial system. Real-estate investment accounts for roughly 12% of GDP. Construction is the main source of demand for much of China’s heavy industry. Real-estate is gobbling up 20% of new bank loans.
China, Edward muses, “has become a field of dreams, a build-and-they-will-come economy.” He predicts that were the economy to slow below Beijing’s 8% growth target, “bad things are likely to happen.” Much of the new infrastructure will turn out to be otiose; excess capacity would linger in many industries; real estate would take a bath, and the banking system would be swamped by a wave of nonperforming loans.
His morose conclusion: “Investors who are immersed in the China Dream ignore this scenario. When the China juggernaut eventually stalls, they face a rude awakening.”