Vancouver's home truths for Australia's China connection

Alongside interest rates, demographic change and the employment rate, China’s economic growth has a significant impact on Vancouver’s real estate market. Australian property watchers should take note.

Vancouver is about 14,000 kilometres from Beijing, separated by the vast emptiness of the Pacific Ocean. However, the health of Vancouver’s housing market is closely correlated with Chinese economic growth, according to Robin Wiebe, a research economist with the Conference Board of Canada.

At first glance, this seems a strange conclusion to draw. The vitality of the housing market is usually determined by local factors such as mortgage interest rates, changes in the employment rate and population growth.

However, Wiebe argues China’s influence rivals those three key domestic factors. “All aspects of the Vancouver housing market and economic growth in China move together and are statistically significant,” he told the Vancouver Sun.

He shows that Vancouver’s housing market was sluggish during the 1990s when the local economy was decent and demographics were favourable. The average resale price increased less than three per cent annually.

However, Vancouver’s housing price surged 24 per cent during the 2000s. Wiebe argues that these results closely mirror China’s economic performance in the last two decades. The 1990s started badly for China, with the economy only growing 3.8 per cent in 1990, following a disappointing 4.1 per cent in 1989.

China’s economy also ended on a relatively weak note in the 1990s, expanding at only about 7.7 per cent in 1998 and ‘99. However, China’s economy surged during the 2000s, expanding at double digits for most of the decade.

The graph below shows that Vancouver house prices closely track that of Chinese real GDP growth.

Graph for Vancouver's home truths for Australia's China connection

Most importantly, Wiebe shows that two local factors – local employment growth and five-year mortgage interest rates – correlate much less strongly than Chinese GDP growth does to the three important market yardsticks of existing home sales, existing home price growth and total housing starts.

Check out this graph which shows how five-year mortgage rates had less impact on Vancouver resale price growth than Chinese economic growth.

Graph for Vancouver's home truths for Australia's China connection

“This could mean that a substantial proportion of Vancouver real estate purchasers do not need local jobs to buy any home (new or existing) and that many do not need a mortgage to buy a new home,” Wiebe said.

The basic principle of statistics tells us that correlation is not the same as causation. Though Vancouver house prices correlate closely with China’s GDP growth, it does not mean China is driving the housing market in Canada.

Tsur Somerville, a professor at the University of British Columbia, says that there is no doubt that the Chinese economy and the rest of the world is linked. But he believes local factors such as interest rates have played a bigger role in Vancouver house prices.

However, what Wiebe has not mentioned explicitly in his analysis is the growing Chinese appetite for overseas real estate and a growing trend for the wealthy Chinese business class to set up new nests around the world.

Chinese investment in overseas real estate assets has surged 25 per cent in 2013, according to Jones Lang LaSalle. Vancouver, just like Melbourne or Sydney, is a favoured city for Chinese migrants and investors.  

Australia shares many similarities with Canada, which are both large sparsely populated commodity exporting countries. Wiebe’s advice that observers need to pay attention to China’s economic health when assessing the outlook for Vancouver’s housing market also rings true for Australian property analysts.

Follow Peter Cai on Twitter: @peteryuancai

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