Rich Chinese investors back in the news…

More Hot Asian Money fluff

As you may be aware, I don’t buy the notion that somehow Hot Asian Money pouring off the Chinese mainland will be enough to keep some of our more bloated markets from correcting.  I wrote a piece about the ‘Hot Asian Money Fallacy‘ if you want to read more about it.  The bottom line is that I don’t disagree that there is money coming in from overseas, but I don’t think it will be enough to keep markets like Vancouver at such ridiculous heights.

A couple of interesting articles have surfaced and offer some new insights into this phenomenon.

China Towns– From the Financial Times

“A game of Chinese whispers has been doing the rounds this autumn. In September, an economist claimed on television that Chinese investors are snapping up homes in east London. Two days later, an estate agent who misheard the program declared that one-third of all home buyers in the British capital come from the People’s Republic of China. Another estate agent got into a muddle, saying one-in-three pupils starting school at Eton College this autumn is Chinese. The true figure is less than 3 per cent.”

Sounds kind of like the whispers that have been circulating around Vancouver.  Lots of anecdotes like this, this, and this but little in the way of concrete facts.

Just how many Chinese millionaires are there?

From the article:

“Some 475,000 Chinese have assets of $1m or more”

Interesting.  That’s a far cry from the 875,000 millionaires reported by the CBC.  Other web sites support the number of Chinese millionaires at around 450K-475K also.

So certainly there are no shortage of wealthy Chinese individuals, but let’s put that in context.  Despite having over 6 times as many millionaires as China, we don’t often hear of ‘Hot American Money’ flowing into Vancouver or Toronto.  Why is that?  It couldn’t have something to do with the fact that American properties are roughly half of our own here in Canada and clearly represent a better investment?  Apparently we’re counting on dumb rich Chinese investors to continue to buy our real estate when fantastic deals about in the US.

Virtually any argument you could come up with for a rich Chinese investor to plow their money into Canadian real estate applies almost equally to the US….except one. One of the arguments to support the sustained flow of Chinese money into Canada is that it has been relatively stable relative to real estate in the US.  I 100% agree that this is probably THE only reason why speculation investment continues in our overpriced real estate.  But what does that imply about the potential impacts of a moderate house price decline, as is being forecast by even the big banks, CREA, and CMHC?  If (when) that materializes, will Chinese investors continue to plow money into a sinking ship or will they turn their eyes elsewhere?

Not just Canada…

Speaking of turning their eyes elsewhere, let’s keep in mind that this pool of Chinese millionaires is not focused solely on the Canadian market.  As the article above noted, Chinese buyers are purchasing real estate in a number of international cities.

 

It’s not simply a love affair with Vancouver.  Contrary to what they might tell you in the rainy city, Vancouver is not universally considered the ‘greatest place on earth’.

 

Taxpayers insuring speculative mortgages by non-permanent residents

I was curious just how much an international buyer would have to put down to get a mortgage at one of our domestic banks.  The FT article noted that there are stringent restrictions on moving capital out of China, making it virtually impossible to get a mortgage at a Chinese bank for a foreign property, as far as I can tell.

Interestingly the big banks will grant mortgages but require a 40% down payment to be considered.  But not to worry!  If you’re a Chinese millionaire, the Canadian taxpayer will gladly guarantee your mortgage through CMHC if you’ll simply put 10% down.  It’s a great way to speculate on Canadian real estate…..and hey, if things don’t work out, you can always screw the Canadian taxpayers as you relax back in China!

That’s probably hyperbole!  Seriously though, if anyone can actually explain what recourse options are in place in the event of a default by a foreigner, I’d love to hear it.

 

Shrinking pool of millionaires?

One of the main drivers of the new sea of millionaires in China has been their unprecedented property boom, which some believe is the monster of all bubbles. In an effort to curb speculation, the People’s Bank of China recently raised interest rates.  That was partly what kicked the snot out of commodities late last week.

And today we find this out:

China’s banks stop real estate loans: report

“China’s major banks have stopped lending to real estate developers as the government tries to cool an investment boom and surging home prices, a state newspaper said Monday.”

“Chinese regulators are trying to cool surging credit, worried that runaway lending might be fueling a dangerous boom and bust in real estate. Beijing hiked interest rates last month and ordered banks last week to increase reserves in a move to reduce the pool of money for lending as it tries to restore normal economic conditions.”

“China’s stimulus-fueled recovery from the global crisis was based in part on a flood of lending that triggered a real estate boom. But regulators have been tightening controls since April, raising mortgage downpayments and imposing other curbs.”

Do they have reason to worry about a property bubble?  Google ‘China bubble’ and read for yourself.  It’s been well explained in many excellent articles, so I won’t cover it here.  It’s obvious that growth in credit in China can’t keep up at this pace.  The PBofC is set to make sure of it.  How they’re planning on deflating that bubble without drastically reducing the number of millionaires remains to be seen.

It also remains to be seen just how money can continue to flow from China at this clip at the same time that their central bank is actively trying to mop up excess credit (money) from the system.

Lots of questions.  But one thing is certainly settled in my mind:  These wealthy Chinese investors are not the savior of our bubbliest markets. Their fate is sealed!

-Ben

 

 



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8 Responses to Rich Chinese investors back in the news…

  1. mac says:

    As much as I’d like to believe your analysis, I’ll believe it when I see it. As I live here in Vancouver, I’m skeptical about the 50K limit on Chinese capital leaving China. Especially when many Dunbar houses have been bid up to 2.0 million from 1.2 million only 2 years ago. If it isn’t foreign money bidding it up, who is it? The blue rinse crowd? Trying to impress each other at the age of 60 by taking on another 800K in mortgage debt for a new monster home?

    • Go back and read the referenced article. It explains how they are skirting those rules. I only brought it up to illustrate that it would be exeptionally difficult to get a mortgage for foreign property from a Chinese bank.

      • “If it isn’t foreign money bidding it up, who is it? The blue rinse crowd? Trying to impress each other at the age of 60 by taking on another 800K in mortgage debt for a new monster home?”

        A lot more likely. Regardless, it’s not sustainable.

  2. jesse says:

    The rich Chinese investor argument reeks of the old .com business model: capture only 1% of the market and selling our ______ online will make us millions! Never mind if the product is overpriced or has little inherent value.

    Those Chinese investor numbers out of Sydney are striking. Is it possible that property there is so highly priced because, well, it’s highly priced?

  3. mac says:

    You must not live in Vancouver. Either than or you haven’t eyes to see.

  4. Pingback: Chinese investors in Vancouver: Is the HAM story more than just hogwash? | Financial Insights

  5. Pingback: UK house prices falling; Carney’s debt conundrum; Is the smart money fleeing China? | Financial Insights

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