China vs. Canada Housing Bubble – Background

The Evergrande Crisis in China

Evergrande, China’s real-estate giant rattled global markets in September by warning it could default on huge debts. Since then, more developers have made similar statements, raising fears of spread across the real estate sector. It is not clear how the crisis will be resolved – by restructuring debts, working things out with the lenders or by seeking bailouts from the government.

As per reports, Evergrande has 1.6 million undelivered apartments and is more than $300 billion in debt, making it the most indebted company in the world on the verge of bankruptcy. And a bankruptcy could be disastrous for the Chinese homeowners, who hold 70% of their wealth in real estate (a side effect of over investing in one portfolio whether real estate or stocks for wealth building).

The news has had an impact on the financial markets around the world. The Toronto Stock Exchange was off by about 500 points, or about 2.5% while in New York the Dow Jones Industrial Average fell by 800 points for a similar percentage drop following the announcement.

It is said that this is China’s first real estate decline in six years with residential sales tumbling by 17%.

Given China’s huge role in global trade, its problems could have a ripple effect in global economies, what experts call something worse than inflation: stagflation. Stagflation refers to an economy that’s experiencing high inflation, but without the robust economic growth that usually comes with it.

Are there other countries at risk of a real estate bubble?

Only two G7 countries are considered exuberant markets commonly known as bubbles – Canada and Germany. The longer a market remains exuberant, the greater the effect on the economy requiring much larger corrections. We had recently covered the situation in Canada in our blog post where we provided our take on whether Canada (specifically the GTA) is headed for a real estate correction?

China vs. Canada Housing Bubble & How does China’s crisis impact Canada?

There is no big immediate or direct threat to Canada as Canadian banks have no direct lending exposure to Evergrande or to China’s real estate sector. However, banks could have some indirect exposure in capital markets or to equity markets through wealth management. Some pension funds such as Canadian Pension Plan Investment Board and Caisse de dépôt et placement du Québec have held small equity stakes in Evergrande, and in other Chinese real estate companies such as China Vanke Co.

And finally, the property giant Evergrande went no further in Canada other than owning the world’s largest log cabin in Quebec.

How do Canadian and Chinese Real Estate Markets Differ From Each Other?

China

What we understand is that China pumped so much into real estate development that it had surplus supply with no buyers. It literally had empty apartment towers that could fill up cities and perhaps house half of the Canadian population. With excess supply and no buyers, the developers have not been able to build and deliver on new projects, further adding to their financial miseries.

Canada

On the other hand, Canada is suffering from a lack of supply issue. While there is growing housing demand from existing population, which includes millennials moving out from their parents’ homes to buy their own property, renters choosing to become homeowners, and of course the steady stream of new immigrants and people on work permit to get annually added to the growing list of hopeful home buyers, Canadian housing sector is facing problems of its own. First time home buyers are struggling to find let alone afford the home of their dreams in major Canadian cities.

How do China and Canada Housing Markets Compare?

China seems to have adopted the Keynesian economics principle which focuses on stimulating domestic spending on education, unemployment benefits, and infrastructure to avert an economic slowdown. One drawback of utilizing Keynesian policies, experts warn, is that overdoing it can result in increased inflation. In China, that investment was majorly directed towards residential real estate development.

In Canada, a country where there is literally no shortage of land, yet there is shortage of land available for residential development. The lack of supply issue particularly in our local Greater Toronto Area (GTA) market can be attributed to A Place to Grow Act, which was introduced by the McGuinty Liberal government in 2007, prohibits any development in protected areas around the Greater Golden Horseshoe Belt.

While the vision of A Place to Grow is a commendable initiative that plans for growth and development in a way that supports economic prosperity, protects the environment, and helps communities achieve a high quality of life, however, it has exacerbated the shortage of housing supply issue.

While there are several news articles and expert opinions on the Chinese and Canadian Real Estate market evaluations, this post attempts to summarize the situation in a nutshell, it is not exhaustive by all means.

Source Credit: CNN.com. FT.com, CBC.ca