China's Market Turmoil = Rise in Canadian Real Estate Prices?
My wife and I live in downtown Vancouver, BC, one of the hottest real estate markets across the country. We just received our property assessment value for 2016, and it has gone up by over 12% in just one year, and that’s probably average for where we live. Places like Lion’s Bay, just 30 minutes outside the city, reports of property assessment values rising 15-20%, and some as high as 30%. Every day I hear about a real estate bubble on the edge of bursting, with home sale prices exponentially rising well above assessment values, a new crane/development being announced and friends complaining that rental prices are getting ridiculously high.
So where does it all stem from, why are we such an attractive market? I don't think it’s a surprise to anyone that foreign investment from Chinese investors over the past few years, and even decades, has been a major contributor to our real estate boom. There are plenty of other factors I’m sure (our incredible beaches, scenic views, fireworks in English Bay, etc.), but I would argue that the Asian influence would be at the top of the list.
Ok, so with the previous in mind, what kind of impact will the recent market downturn in China have on our precious real estate? For those of you who might have been in a coma over the past few months, here's a quick update – China’s stock market isn’t doing so well, like not well at all actually. It all started in June of 2015. At the time, China’s stock market was on an incredible hot streak. With the state-owned media urging them on, many people started pouring their money into stocks. The resulting growth was explosive but unstainable. As the demand for stocks increased, so too did stock prices. Meanwhile, the overall Chinese economy had actually been slowing down, and debt was skyrocketing. This led to a sudden mass loss in confidence, and a shocking drop in the Chinese stock market.
Over the past few months, the Chinese government has done everything in its power to stop losses. At first their efforts seemed to be working, with volatility in the region decreasing towards the end of 2015. However, over the past first few days of trading in 2016, it’s clear that there is still a lot of anxiety and fear amongst investors in China. Just yesterday, China’s stock market was again halted after only 30 minutes of trading, the shortest day in its 25 year history. Since the majority of investors in China’s markets are individuals, rather than institutional investors, panic and sell-offs have spread at a much faster rate. Most economists agree that the recent wave of downturns stems from the lowering of the local currency.
This leads me to the Renminbi (also known as the yuan), China’s currency, which is fixed to the U.S. Dollar. Just recently, and with little warning, the People’s Bank of China lowered the exchange rate of the yuan against the U.S. dollar by 0.51%. This recent currency move has led to a massive selloff in the region, with investors looking to move their assets out of China. Although it’s not as easy to convert and move funds out of China, as it is for us to move down south, the government has yet to impose any major restrictions or limitations on doing so.
So now that you have some lay-of-the-land, let’s bring it back full-circle. Below is a simple flow-chart that I think will help in explaining why I think the recent market turmoil in China will lead to higher demand for real estate in Vancouver. Working our way through, it seems pretty clear that a major fall in the Chinese Stock Market, could ultimately lead to further increases in Canadian real estate prices.
I understand that this is a heated topic, so I welcome your comments and thoughts. As an investment advisor, it’s important for my team and I to help educate others on the importance of diversification. Although my opinion is towards a further increase in property prices in Vancouver/Toronto, this is not a fact or with 100% probability. It’s important to consider your home and investment properties as part of your net worth, especially as they are typically some of the larger portions of your portfolio. For more specific questions or concerns, please seek the advice of a professional real estate agent. Here is my direct contact information – email@example.com.