NOVEMBER 25, 2010
Bubblicious in China
I've said before that there are really only two global property bubbles that eclipse ours: The Australian bubble and the Chinese bubble. In a strange way, our economy and that of Australia are directly dependent on the continuation of the Chinese economic miracle.
Yet there is increasing reason to question the sustainability of the bubble in China and if you're a Canadian, you owe it to yourself to get educated on this matter.
While discussion of a Chinese bubble is not new, the recent commentary by respected money managers Jim Chanos and Vitaliy Katsenelson adds a new level of insight into the discussion (hat tip to The Unconventional Economist for pointing these out).
These articles are as insightful as their implications are shocking. It is very difficult to argue that the manufactured GDP growth rate is anything but unsustainable. Some estimates have pegged construction at 60% of GDP, which is shockingly high! Entire new cities are being built and are sitting completely unoccupied. This is not hyperbole; It is not anecdote. You can see them for yourself.
Here are some more shocking stats about the Chinese building boom:
There are enough vacant residential homes to house half the US population
Since 2009, 2.6 billion square metres of office space has been built, much of it sitting empty. That's roughly a five foot by five foot cubicle for every man, woman, and child in the country.
Is this sustainable? Definitely not!
But what effect will the inevitable slowdown in construction have on us here in Canada. I see two major fallouts:
1) Demand for commodities like copper falls precipitously, leaving our commodity-laden stock market vulnerable to correction.
2) The pool of millionaires in China quickly shrinks as any cessation in credit expansion would very likely cause a significant correction in property values. And with that, we slash the number of investor immigrants coming to Canada.
If you live in Vancouver and embraced the fallacious notion that rich Asians will keep home prices at an astronomically high plateau, I've got news for you. The impact of these rich Asians entering our country is not what you think it is as they account for significantly less than 10% of total sales volume for Greater Vancouver. But even if they were the golden goose, look at the big picture.
Economic headwinds in pictures
Some nice visuals from a CIBC economics report released today:
As stimulus is set to wind up, with Flaherty adamant that there will be no extensions, it will be interesting to see just how ready the economy is to stand on its own two feet. Ending stimulus measures is expected to produce a significant drag on economic growth.
The current state of our largest trade partner.
Increased savings + shrinking outstanding credit = deflationary pressures, particularly on real estate which is extensively financed via credit.
Coming to a neighbourhood near you just as soon as people realize that they're actually poorer than they think.....see next pic!
Pretty much self-explanatory!
As often said before, the bounce in GDP growth coming out of the recession was almost entirely due to 3 things: Inventory restocking, housing, and government spending.
With housing starts now falling and the government realizing that austerity will either be embraced or enforced, it's safe to say that neither construction or the public sector will be significant generators of jobs going forward.