Carney says a four letter word

Vancouver's aspirations to become like New York took a big step up today with a feature article in bloomberg: China Buyers Make Vancouver Pricier Than NYC

Buyers from mainland China are leading a wave of Asian investment in Vancouver real estate as China tries to damp property speculation at home. Good schools, a marine climate and the large, established Asian community as a result of Canada’s liberal immigration policy make Vancouver attractive, said Cathy Gong, who moved from Shanghai to the Shaughnessy neighborhood on Vancouver’s Westside about three years ago.

“The schools here are the best and there are a lot of Chinese people here,” said Gong, whose son is in sixth grade at Shaughnessy Elementary School. Eastern Canada wasn’t an option because “I cannot bear cold weather,” Gong said. Vancouver has the second-largest immigrant Chinese population in Canada after Toronto.

The usual arguments of Vancouver's attractiveness, good schools, temperate climate, large Chinese community, and favourable immigration policies are cited as reasons for the high level of investment in Vancouver real estate. Of course the article fails to mention how, even after the multiple "waves" of Chinese immigrants over the years, the majority of homeowners and homebuyers are still local.

Anyways, the Bloomberg story is fun for discussion but not to be outdone, Bank of Canada Mark Carney gave a speech today on the shifting sands of the global economy. Although drier than Bloomberg, I tend to pay more attention to what Carney says, given the power and influence the Bank possesses over Canada's economy. Of particular interest to Vancouver housing market enthusiasts are the following quotes, first on capital flows (emphasis mine):

While emerging economies are having difficulties absorbing large private flows, advanced economies have often misallocated surges in yield-insensitive gross claims. In Canada, as elsewhere, large capital inflows will require vigilance from public authorities and private financial institutions. Financial history, particularly during times of large power shifts, is rife with examples of booms stoked by dumb money that turn good situations to bad.

And then on inflation risks:

The possibility of greater momentum in household borrowing and spending in Canada represents an upside risk to inflation in Canada. The persistent strength of the Canadian dollar could create even greater headwinds for our economy, putting additional downward pressure on inflation in Canada.

How does these statements segue with the Bloomberg article? Well it's hard to completely understand the context of Carney's statements regarding capital flows. If, for argument's sake, we were to look at the investment in Vancouver real estate in the past 5 years due to immigrants and nationals from Asia, we might start thinking that, on a cumulative basis so as to make it into a tangible and sizeable economic entity, Vancouver real estate might actually be drawing the attention of policy makers. Based on that inference alone it seems like articles like the one from Bloomberg are not going unread in the halls of Ottawa.

As I mentioned in a previous post, it looks unlikely that nation-wide action to further subdue household credit through CMHC policy changes is likely, with much of the country apparently cutting back debt growth. Two regions -- Vancouver and Toronto -- seem to be showing an immunity to debt curbs as prices continue to increase in the face of low yields -- i.e. "dumb money". Though it's wild speculation (as it were), I would not be surprised to see some targeted efforts to reverse price increases in both Vancouver and Toronto, markets that are annoyingly distorting the nation's house price figures.

The Chinese Property Bubble

It seems, according to news sources, mainland Chinese buyers are sweeping in to grab property around the world. But nor are other areas around the world oblivious to this recent development:

1) Hong Kong: Hong Kong housing bubble! Mainland buyers blamed

2) Australia: Chinese whispers: they're driving up housing prices

3) Vancouver: Mainland Chinese buyers driving up luxury home prices

4) Los Angles: China’s new rich set trend buying luxury homes in California with cash

5)Korea: Rich Chinese buy villa in S. Korea resort to spend weekend

6)U.S.: China property buyers go global as yuan rises

7) Singapore: Chinese developers eye S'pore property

8) Japan: Japan luring Chinese property shoppers


Hat tip to unicas on Realestatetalks

Low Rental Yields

If you think Vancouver has low yields, check out other figures from parts of Asia, courtesy Global Property Guide:

Taiwan: Price Yields 2.84%
Hong Kong: Price Yields 3%
China: Price Yields 3%
India: Price Yields 3-4%

Those are some mighty poor cash returns, if I might say so. Certainly GPG holds back no punches calling bubbles in all the above countries and territories. Remember these are yields before expenses. In Taiwan, it is likely newly-minted landlords are making a 0% cap rate.

But before we pass off these countries as simply being in a giant asset price bubble fueled by low interest rates, it's worth asking why their yields are so much lower than in North America's. Certainly avid speculation and a lack of perceived viable investment alternatives may play a role. There is one fundamental statistic, however, that can justify lower yields: high rental and income growth rates. While inflation is high in these countries, incomes are continually outpacing inflation by a healthy margin as they play catch-up to the developed world. (Albeit Hong Kong is pretty darn first world!) This in turn increases the present value of future cash flows and justifies a lower present-day yield. This is a similar concept why single family dwellings in areas experiencing density increases have low yields: their future cash flows due to re-development will outpace expected rental growth of the current structure.

Rents in Hong Kong increased over 6% last year; in addition, it is estimated 90% of mortgage loans are variable rate, with the variable rate currently around 2% or so. But it is worth noting rental yields have been low for a long time, what Global Property Guide analysts attribute to the wealthy using property as a method of diversification. Though if rents are increasing at a healthy pace, there may be more to it than diversification. In addition, while the "wealthy" certainly have the luxury of throwing a few % of their net worths into real estate, the majority are blithely going along for the ride with a significant and relatively undiversified portion of their net worths.

It helps to look at these Asian countries' property markets since a large number of buyers and sellers in the Vancouver area originate from these countries. It gives us some perspective of the attitudes and comparables these buyers are using when determining the value of North American (and specifically Vancouver) real estate. That said, I have some concern that the economics that, in part, can reasonably justify lower rental yields in certain countries are being improperly applied to North America, where wage growth is limited close to inflation.