Vancouver’s housing market fortunes closely mirror trends in the Chinese economy, according to an analysis by an economist with the Conference Board of Canada.
Robin Wiebe says his number crunching has found that there are strong links between home sales, price growth and housing starts in Vancouver and the overall health of the economy in China.
Wiebe made the same comparison with the Toronto housing market and found that Chinese gross domestic product figures were linked to growth in that city’s housing sales, but not to price or starts. GDP is the market value of all goods and services produced in a country.
All aspects of the Vancouver housing market and economic growth in China move together and are statistically significant, Wiebe said.
“It’s another piece in a puzzle,” he said by phone from Ottawa on Monday. “It’s evidence that the Chinese economy moves with various Vancouver real estate variables. It’s another piece of evidence that supports the link between Vancouver and China.”
In the Hot Topics in Economics blog on the Conference Board of Canada website, Wiebe wrote that the effect of China’s economic growth on the Vancouver real estate market rivals the effects of three domestic factors: Vancouver’s population growth, changes in employment, and mortgage interest rates.
“The chief implication is that observers need to pay attention to China’s economic health when assessing the outlook for Vancouver’s housing market,” said Wiebe, a senior economist at the Conference Board’s centre for municipal studies.
Determining the extent of foreign ownership of real estate is impossible in Canada. No level of government keeps track of the country of origin of purchasers who often use local buyers as proxies. Wiebe said that in the 1990s, Vancouver’s housing market was relatively sluggish, despite what he called a decent economy and favourable demographics. Annual employment increases averaged 2.3 per cent while population grew at 2.5 per cent. During that same time, average resale prices rose less than three per cent per year, and ended the decade up 24 per cent.
“The market performed much better during the following 10 years,” he said. “Annual sales of existing homes exceeded 36,000 units, a previously unheard-of volume, for five straight years between 2003 and 2007. The average transaction price doubled between 2000 and 2009, with a 20-per-cent spurt in 2006 alone.”
A big contributing factor, he said, was a substantial drop in mortgage interest costs, which helped people buy homes. A five-year-term mortgage, for example, dropped from 13.2 per cent in 1990 to below seven per cent in 1998, before increasing in 1999. By 2009, the five-year rate fell to an average of 5.1 per cent.
Wiebe wrote that China’s economy grew by only 3.8 per cent in 1990, following a 4.1-per-cent increase in 1989. That compares to the previous five years where GDP growth averaged roughly 7.8 per cent.
The 1990s “ended on a weak note with an annual GDP growth of 7.8 per cent in 1998 and 7.6 per cent in 1999. The 2000s were significantly better — annual Chinese GDP growth never dipped below eight per cent.
“Now the pendulum has swung again,” he wrote. “Despite slightly faster growth in employment (2.1 per cent on average in 2010-12) and population (1.6 per cent), along with even lower mortgage interest rates, Vancouver resale volumes fell 23 per cent in 2012 and average resale price dropped 6.4 per cent. One clue to this tepid performance is that China’s real GDP growth fell to a 12-year-low, estimated at only 7.8 per cent, in 2012.
“Statistical analysis confirms the importance of China’s economic health to Vancouver’s housing markets,” he wrote in the blog.
He said his analysis shows that local employment growth is not significantly related to existing home sales, price growth or housing starts.
“This could mean that a substantial proportion of Vancouver real estate purchases 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,” he said. “On the other hand, better economic health in China gives its residents wealth to spend on Vancouver housing.”
Tsur Somerville, a professor at the University of B.C. and director of the Center for Urban Economics and Real Estate at the Sauder School of Business, said a correlation between the Vancouver real estate market and GDP growth in China is not causation.
“It implies that our housing market is driven by what is going on in China,” he said on Monday. “I think there is an element to the fact that changes in world commodity prices are affected by industrial output in China. That certainly affects all of us.”
Somerville said there is no doubt that the Chinese economy and the rest of the world are linked. But he believes bigger factors at play may be the internal market and total immigration from Asia, not just China.
“The house price growth has been stunning in Vancouver since the year 2000,” Somerville said. “I would argue that a decline in interest rates has had a much bigger effect than the growth in Chinese GDP.”