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There Is a Chinese Housing Bubble All Right; It Just Happens to Be in Vancouver, Canada

April 18, 2011
CanadianValue

CanadianValue

210 followers
I’m not the sharpest knife in the drawer, but some things are just so obvious that even I can easily see it. And one thing that is obvious to me is that Vancouver housing prices are just not right.

Royal Lepage Real Estate Services recently issued a report containing Canadian real estate statistics.

Consider the following:

Average Cost of a Two Story House in Vancouver: $1.1 million

Average Cost of a Two Story House for Canada nationwide: $379k

Vancouver cost 2.9x

Average Cost of a Detached Bungalow in Vancouver: $980k

Average Cost of a Detached Bungalow in Canada nationwide: $341k

Vancouver cost 2.87x

Average Cost of a Standard Condo in Vancouver: $507k

Average Cost of a Standard Condo in Canada nationwide: $237k

Vancouver cost 2.13x

If I lived in Vancouver, I would be selling my house tomorrow and moving to another city where I could buy three houses for the same cost. Vancouver is beautiful, but in the end housing prices have to be tied to the owner's income and in Vancouver they are surely not.

A big cause of the bloated prices is strong demand from China. According to this article a Vancouver real estate broker said the following:

http://www.msnbc.msn.com/id/37963066/ns/business-bloomberg_businessweek/

Broker Andrew Hasman sees 70 to 80 percent of his high-end listings go to mainland Chinese. He oversaw an open house recently for a $1.8 million home. Of 100 visitors, 91 were from China."

And that demand is going to remain strong for the near term as recent tightening of property and lending restrictions inside China push Chinese nationals to look abroad for real estate to invest in.

When you consider that housing prices in the rest of Canada are also somewhat expensive the prices in Vancouver seem that much worse. Consider these numbers from this article in the Globe and Mail:

“Home prices are simply way out of line, especially when viewed in relation to household income. The ratio of house prices to income has historically averaged about 3.5 in Canada. It now stands at about 5.5?

There is an entire generation of people in Canada who know nothing but a world of 5% mortgage rates and buying as big a house as you possibly can because that is what all your friends have done. As interest rates rise and the attention of Chinese investors eventually declines (at some point — who knows when) there isn’t anything to hold Vancouver house prices at levels anywhere near where they currently are.

One final point to consider from this report that I came across:

http://www.zerohedge.com/article/guest-post-elusive-canadian-housing-bubble

Let’s pause for a moment to digest the RBC report:

- An average Vancouver household (that is a family of usually two income earners, not a single person)spends over 70 cents of every pre-tax dollar they earn on house ownership costs. Deduct unavoidabletaxes, and this amount would rise to nearly 100 percent of an average household income in Vancouver



- An average Toronto and Montreal household spends over 57 and 47 of their pre- tax income on house ownership costs, or nearly 80 and 70 percent of their after-tax income respectively

An average Vancouver household spends almost a dollar on every dollar they earned. This is during:

- A severe recession (a subject that deserves its own section, and as such is covered later in this paper)


- Historically low interest rates

Incredible! Vancouver’s property prices are reaching not just all-time highs in nominal terms, but are exceeding those seen during the previous real-estate bubble in real-terms. However, cheerleaders of a perpetually growinghousing market point out that housing affordability, which can be taken as a sign of measurement of the housingmarket health in Toronto, Montreal and Calgary is not nearly as bad as during the housing bubble of the late 80s. This myth of positive affordability figures can be easily refuted by referring back to the cost of borrowing.

Now the question becomes, "How does one try to take advantage of this bubble? If anyone has any good ideas I’d love to hear them. The idea needs to be focused on something exposed to the Vancouver real estate market specifically. I’ll do some digging.

About the author:

CanadianValue
http://valueinvestorcanada.blogspot.com/

Rating: 3.5/5 (28 votes)

Comments

glorious
Glorious - 3 years ago
Vancouver has had its share of housing bubbles. Prices crashed 50% after the early 1980s bubble. Check out this rollercoaster simulation of the last 30 years of house prices for a good visual:

http://vancouvercondo.info/coaster
Bubbleburst
Bubbleburst - 3 years ago
Is it really a lot of Chinese or other foreign investors that find Vancouver so enticing and they all want to immigrate here or is it the BC politicians and realtors using a few selected foreign acquaintances guised as foreign investors that are creating the hype and illusion of demand to keep the prices high and the snobbery of Vancouver being know as one of the best and most expensive cities to live in the world. How many times has that statement been promoted especially during the Olympics. The promotions continue folk. Most regular Vancourities with good incomes cannot afford to buy a home in Vancouver and don't tell me there isn't any resentment brewing as they have to rent from investors and pay through the nose. Home prices in Vancouver are criminal and there should be a public investigation ... and not by BC politicians or government officials let another province or country investigate. I smell rats here.

Bubbleburst
Bubbleburst - 3 years ago
After posting the above comment ... I chatted to an Australian who informed me they also had the same problem which resulted in higher real estate prices as Chinese investors swamped the Australian housing markets and buying everything in sight ... I was told that the Australian Government implemented new rules and regulations regarding who was able to buy Australian properties, i.e. have to be an Australian and actually living in the house they buy. You'd think our Canadian Government would also be bending backwards in trying to protect us and our property rights, that if they really cared about the Canadian public or do they? The new Canadian rules that came in effect March 18th only limits what Canadians can now afford to buy and qualify for in a mortgage - there is no limit on what foreignors can afford (since most are financed overseas) or how many homes they can purchase at once.???

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