Storm clouds over China; More data on the Toronto condo market; What's driving the Vancouver housing market?
JUNE 23, 2011
Storm clouds over China?
All is not well in the People's Republic.
You may recall that earlier in the week, we examined a fascinating editorial in the Wall Street Journal suggesting that a reckoning day was approaching for Chinese banks. Indeed credit market tensions are escalating. The Shanghai Interbank Offered Rate (SHIBOR) is surging, reaching heights not seen since the depths of the credit crisis. The one week and two week SHIBOR rates for the past three years are shown below:
This rate reflects the interest rate that Chinese banks charge other banks to lend them money (yes, banks borrow money from other banks), and it rises when banks become unwilling or less able to lend to each other. It is a reflection of liquidity drying up, likely in the aftermath of the Chinese central bank hiking reserve requirements at banks in an attempt to quell surging inflation.
The potential severity of the problem is evident in the fact that the People's Bank of China (their central bank) re-launched their reverse-repo operations for the first time in two years. Reverse repos are a tool used by central banks to inject liquidity into the banking system so that credit markets don't seize up. And speaking of drying liquidity, the central bank also suspended bill issuances today for the first time in five months, likely due to tightening liquidity.
None of this is good news. The implications are certainly debatable. Some have suggested that the tightness in credit markets are merely a temporary symptom of the central bank raising reserve requirements. Nevertheless, analysts are starting to weigh in on the potential of a hard landing in China, an event that would have devastating consequences for Canada:
"There are signs of an economic slowdown in China, and we believe that this may not be just a transient problem as the situation is much more complex with structural problems" -Credit Suisse analysts Vincent Chan and Peggy Chan
"The risk of a hard landing for the Chinese economy is increasing" -Alexander Lee, a Hong Kong-based analyst at DBS Vickers.
"China appears headed for a hard landing as the country’s housing market shows more signs of weakness." -Bloomberg
Finally, consider new data regarding Chinese factories:
China factory sector close to stalling- Financial Post
China’s factory sector barely expanded in June...reflecting the impact of monetary policy tightening and slack global demand.
...“It fits with the broader picture of weakness not just in the developed world but also in the emerging world as well.”
China is one story every Canadian should be following...
More data on the Toronto condo market
I received an interesting email from a reader who is an analyst for a company in Canada. He sent me the following interesting figure and the accompanying note:
"My primary concerns surround the widening gap between High-Rise:Low-Rise sales since the start of 2010. One media release suggests that new suite designs in great locations were driving demand. I’m not convinced that is a very robust analysis. I’m not sure what implications this may have for recent purchasers and owners of Toronto high-rise property, but I have not noticed this trend gaining much attention in the media and I think it should."
It has gotten attention, and indeed it should. New data has suggested that over half of all new condo sales are from 'investors'. We use that term loosely around here as any real estate 'investor' who purchases a cash-flow negative condo, banking on capital appreciation, is nothing but a speculator.
Yesterday, an article from the Star noted that condo sales were at an all-time high in Toronto, registering at a 26,000 unit annualized pace in May, even though demographic demands are estimated at closer to 15,000 units.
Now certainly the decline in low-rise new family homes would be expected as the city density increases, but the drop is quite staggering....nearly 50% from 2004 levels. Far more interesting to me is the rise in condo sales. With nearly 300 condo developments in the works and nearly 34,000 units nearing completion and immigration expected to total 65,000 in Toronto, condo 'investors' had better hope they can find someone more foolish than them to sell to.
What's driving Vancouver's housing market?
That's the title of this interesting piece courtesy of the Globe and Mail. We all know the Hot Asian Money story, which has led many in Vancouver to plow head-long into a lifetime of debt serfdom in order to keep up with the Wangs. Some key quotes:
"There seems to be more myths than facts about Mainland Chinese investing," Colliers president Greg Ashley wrote in the intro.
"This trend is certainly impacting single family housing values in Vancouver-West and Richmond. However, it is not the driving force behind all sales. A number of recent launches reported large numbers of Asian buyers -- yet a significant portion of these buyers are actually local residents not foreigners."
Certainly the data argues very strongly against the notion that a sea of wealthy Chinese immigrants is what is driving real estate prices. If it were true, then we would expect leverage ratios to be much lower.....unless those buyers were overwhelmingly locals (regardless of ethnicity), who earn local income and take on massive debt loads. The fact that BC consumers have by far the highest debt-to-income ratio in the country further suggests that what is really driving the Vancouver housing market is the unsustainable expansion in mortgage credit.
If you're a Vancouver resident contemplating making your first purchase, think long and hard about the reality of the Hot Asian Money story. Then take a look at the fundamentals. Then run like hell!
Cheers,
Ben
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5 Comments
Oops....Accidentally disabled comments. Sorry to anyone who tried posting a comment earlier today.
I don't think the Chinese interbank rates are comparable to, say, LIBOR distress in 2008. The Chinese banking system is too closed.
and do we -REALLY- trust the data coming from the Chinese government? Not to say there is not a problem there, but how reliable/accurate is that data?
Hi Ben. You've written about what a Chinese economic slump might mean for equities and commodities, but what's your view on the likely immediate effect on Canadian house prices specifically? Might there be a flight from risk in China that would cause an even more frenzied market here? Cheers.
Three points regarding driving force behind rising prices in the Colliers report and Colliers' claim that foreign investors are not the prime source:
1) Immigration Policy: Has anyone looked at the effect of requirements for Investor class of immigrants to Canada? Investor class requires immigrant to have C$1,600,000 to enter, of which C$800,000 is "loaned" to the govt for 5 years and 2 months with no interest and then returned to the immigrant who is now a "local resident". At this point, there no longer is a requirement to "invest in economic job creation, etc." and the funds can be redeployed to buy a first home, or upgrade to a more luxurious home.
2) Education & Culture: There are a number of homes in my neighbourhood where the house is occupied just by older children going to one of the "premium" schools (private and public) on Vancouver's Westside, or the house is occupied by a spouse, while the father/husband continues to live and work overseas. Since the Westside is home to a number of popular schools, there are houses in the school catchments that are only occupied during school hours from 9am to 3pm while the younger children go to school. The rest of the time the house sits empty. (As I was told by one of my ESL students, a sign of wealth for the Chinese is to own at least four houses, fully furnished, but not rented out to others.)
3) "Local" urgency to get into Vancouver's Westside market before prices rise further: It is not uncommon for houses to sell within two weeks for $50,000 to $300,000 over asking, especially near good schools. And prices are rising quickly on a month over month basis, especially since the Lunar New Year in February. This causes longtime "locals" to jump into the market, fearing further increases, thus further exacerbating the price situation. "Locals" are reacting to the "driving force" behind housing sales.
I also think that there is a trend for the new upper middle class in China to establish safe havens to go to, in the event China clamps down further on home ownership there, or, the environment (eg: pollution, crowding, policies) in China gets unbearable for families. They are establishing residency for family members in Canada and elsewhere as an "escape" when the time comes to leave China. In the meantime, continue earning as much funds as possible until that day comes.