Julian Lee at VREAA 29 Aug 2011 1:56am & 7 Sep 2011 12:08am –
“I am a first generation immigrant here to Vancouver. I came about 20 years ago with my parents from Asia. This is a beautiful city and I am proud to say that I am now a Canadian and have completely integrated into the culture. I have a particular perspective on the Vancouver real estate bubble as I am very familiar with both cultures. Here are my 2 cents:
1. Are there rich asians who are buying houses? Yes, there are a lot of it. But they are not the majority of real estate purchasers. They make up purchases in some of the most expensive areas. But it doesn’t justify that all areas should go up by the same percentage. For example, if you go to an open house on some of the Westside neighbourhoods, you’ll be amazed by their purchasing power. It’s incredible, beyond anything that we have seen here, completely consistent with other stories. The street is loitered with expensive cars. You can also take a look at the parking lot of some west side schools, their kids roll in far fancier cars than their teachers. But, if you are to go to an open house say in the commercial area, these guys are nowhere to be found. So it’s not true that they are the single most important factor in driving up house prices in every area, but they do certainly make a difference in some areas. I think across the entire lower mainland they don’t make up the majority as they almost never touch anything in Surrey (except South Surrey White Rock) or Langley. For now they mostly operate in Vancouver, Burnaby, Richmond (until the Tsunami, notice how Richmond’s price stopped flat at the same time as the earthquake), and West Van. As for the 5% foreign buyer stat that have been bandied about here, I would be very curious to ask who is classified as a foreign buyer? Is an immigrant a foreign buyer? Is it simply a non-canadian citizen or a non-canadian resident? That does make a difference because a lot of these rich asians park their wife and kids here. So their family is technically canadian residents, are they still considered a foreign buyer at that point? The final thing is, almost all of them will buy. They will not rent, every investor immigrant that lands here from Asia will buy a property of some sorts. They really don’t care about how high the price is, we have not reached a level that would make them feel that we are expensive compared to a place like Beijing.
2. About this bubble. Is there a bubble? I would say there probably is. But it is not as big as one may imagine. Here is why. All the statistics that have been gathered have been compared to western stats. Meaning that all rent to own ratios, average cost to income ratios, etc, are all using historical statistics in the Vancouver / Canadian markets. But that’s not necessarily correct. Because the demographics of Vancouver is shifting. When you look at any given city’s ratios, you need to take a look at their demographics. So for example, if your city is 20% chinese, I would use Beijing’s ratios multiplied by 0.2. If the city is 10% Indian, then use Mumbai’s ratios multiplied by 0.1, etc. Basically, I would take into account the cultural differences of these ratios. Taipei’s rent to own ratio is a lot worse than Vancouver’s, to the tune of double or triple as bad. This is just an example, do I expect that Taipei or Beijing will ever correct to Western levels? Not a chance. It’s just the way that different cultures value real estate. I would be curious what that ratio would look like once the cultural differences have been considered. I would imagine that we would still be higher than the number, but it wouldn’t be as astoundingly high as it currently is. So while I feel a correction is in order, I would be shocked if Vancouver housing crashed.
3. People always ask me this, why do the immigrants come here? I am a Canadian Citizen who immigrated from Asia when I was young. I have to say, it’s the best thing that has ever happened to me. To understand the core immigration issue, one must examine what is important to rich asian people. Believe it or not this all starts with the one child policy in China. As a result of this policy, Asian families, who normally are very children focused, have become even more so. For anyone who has ever received an education in China, he/she would know that it is worse than hell to go through the highschool final examination (the so called gao kao). Basically, you prepare night and day since the age of 15 till you graduate when you will take a national university entrance exam which will determine your fate for the rest of your life. Like it or not, whether you are rich or poor it does not matter. Everyone needs to go through this. No matter how rich you are, places in the best Universities in China cannot be bought with money, no matter how much. Anyways, no parent wants their kids to go through this. So they must find a way to get them abroad.
Now you ask, there are a ton of places with good education systems, why here? Well, when you only have one child, you really don’t want anything to go wrong with this kid. The only other person that you trust with this child is your wife. So the wife must also immigrate with the child. However, unlike the child who can probably integrate into any community easily, the wife can’t. I am not even 30 and I have to say it is hard for me to drop into somewhere say Germany and integrate easily into the community. Try learning another language when you are 40 and you’ll find out in a hurry that it is not that easy. So you need a huge chinese community where the wife can pretty much not learn english, or know very little of it, to get around. Sound familiar now?
Now, it may sound absolutely absurd to us, but everytime I travel to the states for business or pleasure my relatives get worried. Why? Because there is this nice misconception that the US is dangerous amongst chinese circles. Why? Cause they have guns. Now, remember, the kid is the most important part of the family, do you really want to send him to somewhere where anyone can carry a gun? Not likely.
This really narrows the places down to a few in the world. You are looking at Vancouver, Toronto, Melbourne, Sydney, Singapore. At this point, you have to look at yourself, now imagine that most of your time is spent in the bustling chinese cities where air pollution is a huge problem, where the only thing green you see if likely the little patch of grass the government decided to put there to show the foreigners, where all you see is skyscrapers, etc. You only have about 3 weeks vacation each year, do you really want to go to Toronto? I have not heard one investor immigrant who have ever said they prefer toronto to vancouver. Vancouver is as beautiful as any city in Asia. And here is the kicker, we are a relatively new city, we bring an air of invigoration to some of these people who simply see a better lifestyle here.
Now, you are down to Vancouver and the two Australian cities. Well, unfortunately for us, the Aussies seems to be perceived as more racist than us nice Canadians. At least in some chinese circles. And, asian people aren’t adventurous like their Western counterparts, they tend to want to stick to a tried and true formula. So, as the first wave of rich asians have landed here and shown that their families will settle nicely in this City without much issues. More will follow. They do NOT take the path less traveled, they like the one that has been stepped on by thousands of people.
Finally, one last thing to consider. It is very difficult to get money out of china. If you are very rich, you need to have an excuse to get your money out. Well, guess what, thanks to our abundance of resources, these guys have a nice excuse to get their money out. They can say that they are coming here to buy resources. Much easier sell to the government.
So there you have it, if you look at all these factors, you quickly realize why it is that they don’t go to Miami, or Phoenix, or Portland, hell, or even Seattle, but they come here.
That said, to cool off the bullish camp. A few thousand immigrants does not make up the whole market, so you will still get the swings, but they will come and snap up anything they can get their hands on if we do go down significantly. Because they know that in this is perhaps one of the rarest places on Earth that fits everything they and their peers are looking for. The ones who are here are buying because they know more are coming. There is a three year waiting queue in Beijing for applications. The scariest part is there have not been any significant efforts to market Vancouver abroad. This is all done by word of mouth.
So there are my 2 cents, I wish everyone good luck in this market. I am not convinced that the market will go up forever as I am intelligent enough to know that no market acts that way. I expect a correction of about 10% over the period of say 3 years. Then it might still go up a bit after that. But I think it’s unrealistic to expect ridiculous returns that we have seen. I bought my place last year, but I had to search very very hard to find the best possible deal in the market in order to hedge myself against a correction. I am actually really glad that there is this forum as it is good to hear a contrarian view over the normal “yeah it only goes up comments”.”
Thanks for sharing your story and your thoughts, Julian.
Your argument that Vancouver is an attractive city for Asian families is persuasive in a broad fashion, but hard to actually quantify. It is a form of the ‘Limitless Demand Argument For Ongoing Market Strength’. It amounts to ‘Vancouver is attractive to Asians’ + ‘There are lots of rich Asians’ = ‘Ongoing price strength in Vancouver ad infinitum’. We have always had the position that there is a chance of this playing out, but that that chance is low (less than 5%).
Many aspects of human behaviour are similar across different cultures, and if you’re a regular reader here you’ll know we expect all market participants to respond in a similar fashion to a pullback in what is an overextended speculative market driven largely by very cheap financing. Markets behave under the same principles in Beijing, Mumbai, Taipei, Europe, and North America; we expect human responses to a failing Vancouver RE market to be similar across cultures. Namely, many buyers will sit on their hands, some sellers will come to market as prospects of ongoing steady gains fade. People almost everywhere have recently learnt that when assets start falling, they can fall a lot. We think they’ll realize that about Vancouver RE in good time.
Asian buyers may well have been attracted to Vancouver, and see it as a safe-haven, for the very reason that prices seem bullet-proof. We expect Vancouver RE to be a lot less attractive to ALL players on the way down.
In the relatively brief 2008-2009 dip, all Vancouver buyers, of all nationalities, disappeared, and only came back when money was handed out for free. There will be no such springboard under the market when it next weakens.
If your way of thinking is true, then we would expect to see an increase in Asian buying in the event of any future price drops. Personally, we don’t see that happening, and expect the opposite.
We’d classify your prediction of no more than a 10% pullback over 3 years as a prediction of ongoing price strength; after a run-up of hundreds of percent, such a ‘correction’ would be nothing more than ‘noise’.
We’ll see how our various predictions play out in the coming years. It probably won’t be long before we get a chance to see how market participants respond to an initial price pullback.
Thanks again for your posts, please continue to contribute here, and all the best with your endeavours.