In Canada [...]]]> The U.S. Federal Reserve borrowed a play from Bank of Canada governor Mark Carney on Wednesday when they promised to keep interest rates low until at least the end of 2014. This is a good indication that Canadian rates will stay low as well, thus continuing the support of the real estate market here.

In Canada last year, the number of sales increased 2.2% over 2010 and the price of an average Canadian house increased 7.1%! In the GTA, the average house increased 10.8%.  Low interest rates will only cause this upward pressure to continue, just as our Bank of Canada has been warning that some real estate markets are overvalued.

This concern that low interest rates are increasing house prices beyond their reasonable value, will force Jim Flaherty, the Canadian finance minister, to make it harder for Canadians to qualify for a mortgage. He may have to reduce the CMHC insured amortization to 25 years or tweak the mortgage qualification in other ways to reduce the amount of new homebuyers.

I have seen clients choose to look for homes outside of Toronto, or even outside of the GTA, even though they work in Toronto because they consider the prices that homes are selling for inflated.  However, even on the fringes of the GTA house prices have ballooned to the same as they are here in Toronto.  A big drawback is the increased commute and plus out there you don’t get all the amenities like public transportation and availability of shopping like you would in Toronto.  Is there a winner in this situation?

The U.S. Fed also said they are considering printing more U.S. dollars, so expect the Canadian Dollar to raise above parity once again.  This will once again allow Canadians to take some of the equity out of their homes and purchase retirement homes in the sun.  Places like Arizona, Texas and the Mayan Riviera are sure to benefit.

Welcome to Shanghai, China, the financial capital of the country.  It is also a hub for commerce, culture, industry and tourism.  Shanghai is a major [...]]]>
The Chinese real estate experience in the past few years has been one of growth, increased growth and now, recently stabilized house prices.  Here we give a history of those years.

Welcome to Shanghai, China, the financial capital of the country.  It is also a hub for commerce, culture, industry and tourism.  Shanghai is a major player in the international market and has the largest shipping container port in the world.  A first time buyer looking for a home near Shanghai would not find one they could afford within an hour’s commute of the city. It is one of the most populated cities in the world, but here we can study in great detail the Chinese experience.

Previously, we spoke about China’s success in creating manufacturing capacity, and with it the creation of better jobs and increased wealth. The key to their success is that their currency, the Yuan (Renminbi) has been pegged artificially lower than its true market value, pegged to the U.S. Dollar.  This creates a situation where Chinese goods look more attractive to U.S. consumers than domestically produced ones. Chinese factories get more orders, and have an opportunity to grow at the expense of U.S. producers.  The market turmoil of 2008 was a symptom of the global economy slowly adapting to this great transfer of wealth from the United States to China.  The realization that the U.S. has lost its greatest source of revenue, that is the discretionary spending of the now waning middle class.

This growth has fueled the Chinese economy, which naturally has caused corresponding increases in the value of real estate. China has become awash in money from investments, as well as income from their trade surplus.

In early 2009, world markets were coming to terms with failed banks like Lehman Brothers and government bailouts of corporations.  General Motors, a former industrial powerhouse was one of many massive corporations that were of concern.  Fears of what could happen under a cascade of failing enterprises touched everyone.  Even China was not immune to the crisis.  They injected over 500 Billon U.S. dollars into their economy in the form of stimulus, and lowered their benchmark interest rate in order to protect their economy, just like everyone else around the world. You had a robust manufacturing, low interest rates, abundant cash flow, great growth potential, and favourable exchange rate, everything was going China’s way, of course there would be tremendous growth! Economic growth that made its way to real estate prices too.

In 2009, the average home price in the largest cities of China increased 3.9% some of those cities saw 1% increases in a single month.  By December of 2009 there was concern that owning property was becoming out of reach of ordinary Chinese people and there was a real fear that there could be a real estate bubble forming.  The government soon created a new restriction on the buyers of second homes.  Buyers would have to come up with a down payment of 30% for any home over 90 meters square and a 50% down payment for any home under 90 meters square.  The ability to apply for a loan for a third home was suspended.

Government Corporations wanted to get in on the money that was being made in Chinese real estate.  Companies totally unrelated to the industry began sprouting a real estate division and then developing residential complexes.  Shipbuilders, oil companies, chemical companies, defense contractors, telecom companies, with no experience, with their huge cash reserves began bidding against each other for vacant land that wasn’t even in a highly demanded area.  This poorly contrived system eventually resulted in the construction of homes that still are vacant, cities that are over built. In some cases the builder would build the residential and commercial buildings of a brand new city and also all the infrastructure like airports. These new cities had such a low population that businesses there would have no hope of developing a customer base to support the various enterprises. Thanks to these bidding wars, in 2010, the average home in China increased 10.3%

In January 2011 Shanghai, and Chongqing started charging a property tax to dissuade ownership in these heavily demanded cities.  They also raised the benchmark interest rate three times. However, the one policy that I believe is the true cause of China finally being able to reduce the high growth has to do with their banks ability to lend money.  They increased the amount of money the banks have to keep on hand out of total deposits.  This policy reduces cash flow in the economy because it reduces the amount of loans the bank can issue.  This one policy more than any other, in my opinion has finally slowed Chinese growth, but it does so at the expense of private enterprise. Banks must now keep 21.5% of all the money they receive from depositors on hand and cannot be used as a loan.

This begs the question: is the result worth the price? It may be that this policy hurts the Chinese economy.  Many businesses require loans, loans that they could only get at private lenders with high interest rates (10% per month!)  Once the owners realized they could not keep up the loan payments, they decided to close their business to escape these loan sharks.

The future for real estate in China: You will see very little to no growth while the restrictive bank policy exists, but the government can remove this at anytime, and we will have the booming, growing China back.  The one thing that China has in its future is a growing middle class that will lead to a corresponding growth in the economy and also real estate.  The government cannot legislate its way out of that.  If they want to slow their growth I would float their currency a bit higher, not too much, and find a balancing act with a lower bank deposit rate.  Slower cash flow will only impede regular Chinese people with their private enterprises that help the economy be more efficient.  They need to let private enterprise prosper if they want to grow their middle class.  Tight money does favour the government corporations, but that is not where the future of China is.  It, like in all nations of the world rests in the hands of the middle class.