‘The end is nigh’

Although you won’t read much about it in the MSM, a plunge in house prices in China’s capital city has turned into big news in parts of Toronto, Vancouver and Richmond. And with good reason. In case you missed it, the numbers are grim. Suddenly there’s a whiff of Phoenix or Miami mixed in with all that noxious smog over Beijing.

According to the Housing and Urban-Rural Development Commission (whatever the hell that is), new home prices last month dropped 26.7%, while home sales in general collapsed 50.9% from year-earlier levels, and crashed 45% from February. The reason seems obvious – the government acted to crush speculators through a severe restriction of credit, a quota on real estate and higher interest rates. That’s the cool thing about a controlled economy without the fuss and bother of elections and this democratic nonsense. At least flippers and speckers weren’t tortured and fed to feral creatures. As far as we know.

Update: China tightens again on Sunday

Why does this matter in Richmond Hill or Richmond? The fear (among realtors in love with HAM) is that a squishing of China’s booming property will erase some wealth that was destined for here. After all, runaway housing values in that city of 22,380,000 people (yes, it’s actually two-thirds the population of Canada) have created a class of millionaires that otherwise would not exist in a country of abject poverty, state-run industries and millions of poorly-paid people who make the crap your Wal-Mart sells.

But escalating land values along with food inflation have spooked the party bosses. The latest growth numbers show the economy powering ahead – up 9.7% in the first quarter, with inflation galloping at 5.4%. Last week that prompted yet another rate hike by the central bank. Making it all worse is oil, because at over $100 a barrel China is spending massive amount on crude imports, since it’s now the globe’s biggest energy pig.

So what happens if hot Asian money gets scarce?

Have you seen ‘Deep Impact’? ‘Apocalypse Now’? ‘Titanic’? ‘The Towering Inferno’? How about ‘Escape from Vancouver’?

I mean, just look at the latest numbers from the national real estate cartel, released yesterday. Nationally, house sales in March stagnated – despite an expected surge in advance of the new mortgage rules that deep-sixed the 35-year mortgage. But prices romped ahead 8.9% – or about four times the inflation rates. But if you exclude Vancouver, then the price increase was cut in half.

Said chief economist Gregory Klump:  “A record number of multimillion-dollar property sales in Richmond and Vancouver West are pushing up average prices for Greater Vancouver, British Columbia and nationally.”

Hmm. And here’s Sotheby’s International Realty president Ross McCredie, in a recent quote:  “There is a very strong demand out there, and it’s real,” he said. “Without the foreign buyer, who is largely Chinese, our market would look completely flat.”

Of course, nobody in Toronto or Vancouver has provided any hard numbers on the scope of Asian buyers, or the impact they’ve had on prices. But that now seems to be a moot point. When enough people believe something, together they can move a market – which is exactly what’s going on. Pumped up by the real estate community and parroted by the media, most people seem convinced planeloads of house-horny Chinese with endless amounts of cash are propelling prices skyward.

This has caused normally sane people to become infected, and start thinking it’s routine to pay $1.2 million for a boring house in Burnaby or Uxbridge that used to be worth a fraction of that. As CREA attests, it creates a scenario in which sales can go damp while prices flame – the classic sign of a perilous market. All it takes for people to realize real estate is insanely overvalued is an event. Might be an interest rate jump. Might be a credit squeeze. Might be freaked-out Chinese.

A blog dawg sniffed out these words, published in December of 2006 in the USA, which was at the frothy height of its doomed housing market:

One argument I hear a lot is that foreign demand for local real estate has grown substantially in recent years, and that such foreign demand will be supportive of prices in the future. Unfortunately, this argument puts the cart squarely in front of the horse. Investors from other countries are well known to be the very last participants to arrive at the scene of a financial bubble. They are the last to hear about all the riches to be made, the last to buy in, and the last to realize that the party is over.

It can easily be seen that foreign buyers chased the U.S. tech stock bubble all the way to the tippy top, and that they lagged prices the entire way. The final onslaught of foreign cash did not even hit our shores until after the Nasdaq had begun to decline from its final peak.

Far from being a positive fundamental, a sudden excess of foreign participation in an asset market is indicative of ill-informed speculative money at work. When the foreigners really start piling on, it’s always a good sign that the end of the bubble is nigh.

Some things never change. We just forget them.