Over the past 18 months, the global fascination with Chinese economic invincibility has steadily waned. And economic sophisticates have reached a consensus: China’s growth rate is slowing. Western demand for exports is falling. And the economy is plagued by overinvestment and excess capacity in housing, steel, and a host of other sectors. Officially, China is growing at a 7.5 percent rate this year. But I guesstimate that China is downshifting. Over the next 10 years, it’s possible that China will grow at an annual rate between 3 and 5 percent.
The hidden story embedded in the Chinese economic “slowdown” is that investment-led growth is plunging. And the global implications are many: industrial commodities like coal and iron ore lose their China “bid”; mining companies find themselves expanding capacity in the face of slowing demand; commodity-reliant countries like Brazil find the China growth tailwind is turning into a headwind; currencies like the Australian dollar are exposed as extremely vulnerable; rail and port operators find that the volume of containers they handle is falling.
The financial press is doing a good job discussing these direct impacts of China’s growth slowdown. But there are plenty of other indirect, second-order impacts that have been ignored.
For instance, the impact of the Chinese economic slowdown on art markets, something I’ve wrote about in this space, has been dramatic—with the share price of Sotheby’s falling by almost 50 percent over the past 18 months.
Another possible casualty of the slowdown may be high-end real estate in Vancouver. Just as the marginal buyer driving art markets has become the über-wealthy Chinese, so too have Chinese buyers come to dominate the market for posh residences in Canada’s gateway to the Pacific.
“Vancouver has been a popular destination for Chinese, driven in large part by its proximity to China and its spectacular feng shui,” notes Jamie MacDougal of Sotheby’s International Realty. The surge of Chinese interest began in earnest following the Tiananmen Square massacre. Vancouver emerged as a safe place to park capital. A long-standing Canadian policy has offered citizenship to foreigners willing to make substantial investments. But MacDougal notes that Chinese offshore buyers arriving in Vancouver spiked to truly unsustainable levels in 2011, during which bidding wars were regular events and property values rose by the week. Check out the chart below.
The current market, notes MacDougal, has changed from one in which Chinese speculators were trading among themselves to one in which the market is “flooded with inventory” and “mainly Chinese sellers” are responsible for the supply. MacDougal’s thoughts are backed up with hard facts. The Real Estate Board of Greater Vancouver notes that in September 2012, the number of transactions of detached, attached, and apartment properties fell 32.5 percent from September 2011. Further, the total number of residential property listings increased by 14.1 percent over the same period—with 4.1 percent of that increase occurring in August 2012 alone. Anecdotal evidence of waning Chinese interest appears to conform to the actual data.
Given this dynamic of rapidly rising supply, it would not be surprising to most observers if prices were falling rapidly. This has not been the case. According to Eugen Klein, president of the Real Estate Board of Greater Vancouver, “prices in the region remain relatively stable overall.” Again, the raw numbers seem to validate his view: average home prices in the Vancouver area were down a mere 0.8 percent between September 2011 and September 2012. It sure seems like we are witnessing stable prices in the face of rising supply and falling demand.
In trying to understand the dynamics driving prices in real estate, it is extremely important to note the illiquid nature of the asset. Barring situations of severe financial distress or noneconomic decision making, sellers are rarely forced into accepting prices at which a market might clear. Rather, they can hold out for better times. Unfortunately, it only takes one divorce-related or estate sale to shift expectations lower in a step function. It may just be the case that high-end Vancouver real estate is loftily suspended, awaiting such a nasty correction.
Remember this cartoon? Wile E. Coyote is running after the Road Runner and eventually finds he has run off a cliff. For a few seconds, his feet are still frantically pumping, and he continues (albeit more slowly) to move horizontally. After a brief period of vertical suspension, however, gravity kicks in, and he plummets straight down. Owners of high-end real estate in Vancouver may soon relearn the lesson that gravity eventually exerts its force—even on the prices of scarce real estate.