Saturday, March 16, 2013

Is the secular bull market in Vancouver RE over?

I don't generally comment on the local residential real estate scene, largely because the topic isn't within the scope of this blog and I don't have much in the way of unique insights. However, I have a personal interest since I live here. In addition, several items came across my desk that piqued my interest.

First, the Conference Board of Canada recently unveiled some research indicating a statistical link between Chinese GDP growth and Vancouver property prices:

Statistical analysis confirms the importance of China’s economic health to Vancouver’s housing markets. Standard tests find significant correlations between the country’s real GDP growth and three important market yardsticks: existing home sales, existing home price growth and total housing starts. By contrast, local employment growth is significantly correlated to none of these and the five-year rate related to only the resale variables. This could mean that a substantial proportion of Vancouver real estate purchasers do not need local jobs to buy any home (new or existing) and that many do not need a mortgage to buy a new home. On the other hand, better economic health in China gives its residents wealth to spend on Vancouver housing.
While statistical relationships do not indicate causality, anecdotal evidence suggests that Vancouver property prices have been buoyed over the last couple of decades by several waves overseas buyers. The first was from Hong Kong, followed by the Taiwanese and now the Mainland Chinese.

The future of foreign demand
I came across an item Friday in the WSJ indicating that the older generation of Mainlanders looked to North America if they intend to emigrate (or at least to get a foreign passport), but the new generation is considering other alternatives such as Singapore, Hong Kong and Cyprus (see video and article). In particular, this wave of "economic refugees" seeking foreign passports as a safety valve should things turn south at home are looking to troubled eurozone jurisdictions such as Cyprus, where you can get a residency permit if you buy property there (and apply for Cypriot, and therefore EU, citizenship after five years). Other eurozone countries like Spain, which saw the collapse of a property bubble, also has a residency for house purchase program.

Yes, I have heard the local real estate boosters. Vancouver is a "world class" city (yes, as "world class" as other Winter Olympics sites like Salt Lake City, Lillehammer, Turin and Sarajevo - can you find them all on a map?). It has a mild climate (as mild as Cyprus or southern Spain?)

So what happens if Mainland Chinese demand starts to decline?

What's the downside risk?
The Conference Board study indicated that the health of the local economy had little or no effect on local property prices. In other words, the locals have been priced out of the market. At what price does local demand start to put a floor on the market?

Here are some back of the envelope numbers. A typical single-detached house on upscale neighborhoods on Vancouver's westside goes for about $2 million, give or take. If you were to open up the career section of the local paper, a good paying job is roughly 50-80K a year. Let's assume that you have a couple with a combined household income of 200K a year - which would roughly puts them in the top 2% in Canada. Assume that they have no other equity from an existing home but have the 20% down payment, they can afford a house of $1.0-1.2 million range based on current interest rates.

That's where local demand starts to kick in.

With the news that Vancouver real estate market slump is continuing:
Sales recorded through the Multiple Listing Service dropped 24 per cent in February to 4,501 transactions compared with 5,895 a year ago, the report said. The provincial average price was $529,922 in February, down 8.1 per cent from February 2012.
...the concern is that the overseas buyer is looking elsewhere is a threat to the secular bull market in Vancouver residential property prices. Should that happen, market price trends will transform itself from a series of higher lows and higher highs to a more cyclically driven market where prices move up and down with the economic cycle.
Right now, I am watching China (for cyclical effects on Vancouver RE prices, as per the Conference Board study) and emigration preferences (for the secular effects).

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.


rp1 said...

Locals aren't priced out, they are heavily indebted thanks to government backed high ratio mortgages. And houses in Winnipeg have appreciated more in percentage terms than Vancouver's. Foreign buying has never exceeded 5%, and immigration has been much lower than the 1990s.

I'd put the blame squarely on city planners for constraining supply, and the CMHC and Bank of Canada for inflating demand, and everyone who fancies themselves a rentier.

I'm surprised that anyone would promote the foreign buyer myth. Do they understand what the reaction will be? From young Canadians can not raise a family in a home they can afford? Everyone here has expressed their preference for criminals from the PRC.

What if there was a crisis and absolutely everyone assured them it was safe, and now they are scalped? Does this country eat its young? Because I think the price for that is high.

Of course foreign speculators have bought in very recently. They always jump in at the end without fail. These flashy people can be counted to lose money. Then they'll be gone. What is left?

WimpyInvestor said...

Please do continue to comment on real estate in Vancouver, as it could be a good indicator of health of Chinese economy. For reference, here are some older vintages that you could compare and contrast:

1. In the late 1980's and early 1990's, Taiwanese wealthy parents bought houses for their "small foreign students" (boys < 15 years old leaving to avoid conscription) to attend US high schools in Southern California (Irvine, Alhambra, etc) and Northern California (Fremont, Cupertino, etc). In hindsight, 1990 was the peak in Taiwan stock market (like Nikkei).

2. Hong Kong wealthy escaping 1997 turnover to China buying in Northern California (Millbrae, Hillsborough, etc). In hindsight, Hong Kong property went up a lot more than US.

3. Mainlanders are now buying in college towns like Boston, Palo Alto (Stanford), and Westwood (UCLA). Not sure how this episode would end.

fish10 said...

Cam - I think you are right AND the commenter above is right.

The stupid actions of the Bank of Canada and the Doubling of the CMHC lending capacity led to a trans-Canada RE boom, which included Winnipeg and Saskatoon which have limited overseas interest.

The result is bumper bank profits courtesy of tax-payer insured mortgages and zero return to savers and of course a RE boom.

However in Vancouver (and Toronto) there was the added kicker of Mainland Chinese money, which added very dry kindling to the raging fire.

We have got as far as we can we can with the Government inspired lunacy - rates are already super low, the CMHC has been widely criticized by many outside bodies and even the Province is tapped out and cannot add anything to it's first time buyer's incentives (the best help BTW for first time buyers is to allow lower prices!)

The only variable that remains is the outside, mostly Mainland Chinese, money. With the restrictions on the investor class immigrants and the crack-down on corruption being considered by the new leaders in China, this is also under threat.

good post.

crashcow said...

I was going to say that prices in all provinces doubled or tripled, but rp1 beat me to it. Did hot foreign money drive up prices in Saskatoon, Winnipeg and Toronto too? Isn't it far more plausible that the same cheap & easy credit made available everywhere in Canada is what caused the housing boom? The same cheap & easy credit that fueled the US, Europe, Australia housing bubbles?

Cause: Reckless lending (which at our peak insanity was: 40-year ams, 0% down at record low interest rates).
Effect: Record housing prices, debt/income ratios, % GDP from RE.

If you're itching to plot something alongside housing prices to show correlation, try Canadian household debt instead of China's GDP.