Blogs & Comment

Twin bubbles across the Pacific

If China's housing bubble bursts, Vancouver's will likely follow.

“The great property bubble of China may be popping,” the Wall Street Journal reported June 9. While some housing market trackers report a slowdown—price increases averaging in the single digits year over year, compared with 15-30% in recent years—in the nine cities tracked by market research firm Dragonomics, prices were down 4.9% in April compared to a year earlier. That follows a 21.5% rise in 2010.

That should strike fear in the hearts of overextended mortgage holders in Vancouver. The evidence has been mounting that the city’s stratospheric house prices, especially at the high end of the market, have been pushed well beyond the average family’s ability to finance a purchase partly by offshore buyers from China. As my colleague Jason Kirby detailed in his cover story in March, the Chinese save so much because they don’t have a social safety net as we know it to fall back on. They have to save big for their children’s education. They have to save big in case of illness or injury. They have to save big for retirement. And yet they have few places to put their money that will hold its value, with inflation running high. So they put it in their own property market and increasingly into offshore markets like Vancouver.

As we all know, these spirals never last. Perhaps both bubbles will deflate slowly. However, if there is a property crash in China, you can expect an awful lot of Chinese homeowners in Vancouver to put their houses on the market all at once. Not only that, it would have a cascading effect across the western Canadian economy, with prices for commodities like copper, coking coal (used to make steel girders for apartment blocks) and even energy probably tanking. As the WSJ reported, China is a “housing-led economy,” with 13% of its GDP dedicated to new housing construction alone.

Not a pretty scenario, but a possibility Canadians should be watching nonetheless.