Thomas White Global Investing
Canada Stamp
February 19, 2010
A Postcard from the Americas
Canada: Chinese Investors Rush to Cash In on Real Estate Boom

Canada housing

The Teranet-National Bank Home Index has risen seven consecutive times on a month-on-month basis.

Is Canada on the verge of a housing bubble? That is the question uppermost on the minds of most bankers and government officials in Canada. But it is a concern that Chinese investors are seemingly dismissing. Even as the Chinese government moves frantically to dispel signs of a real estate bubble in the world’s fastest growing economy, Chinese investors are looking to invest in markets abroad, says the Globe and Mail. And Canada beckons.

Despite the recession, Canada’s real estate market provided a bright spot, growing 7.7% year-on-year compared to 2008. Now, with banks offering some of the lowest interest rates ever on housing loans, demand has picked up, so much so that analysts fear that Canada might suffer from precisely what the Chinese government fears – an asset bubble and subsequent collapse. The country is currently playing host to the Winter Olympics, with an estimated $6 billion already been spent, most of it towards upgrading infrastructure. Has there been an “Olympic bounce” in housing prices? Studies have not shown any significant correlation between hosting the Winter Olympics and a subsequent rise or fall in real estate prices. Yet, the Canadian market is booming like never before.

This is evidenced by the Teranet-National Bank’s Home Index, the closest Canadian equivalent to the Case Shiller Index, which climbed 2.9% on an annual basis in November 2009, just 0.1% away from its all-time high touched in August 2008. The scenario forms an undoubtedly attractive proposition for Chinese investors who have been deterred by their government’s recent sales tax hike on properties that are resold within five years of their purchase.

Although the prospect of a recovery in the housing market is no doubt encouraging for Canada’s economy, would a flood of foreign investor interest in the country’s real estate benefit the average Canadian buyer? Already, house prices in Vancouver are beyond the reach of most buyers. In fact, the Canadian Real Estate Association predicts that the average price for a home will rise to $322,543 this year, and economists fear that is around 10% to 15% higher than what prices should be. Real estate prices have virtually doubled in the past five years, with household incomes failing to match that rise, making affordability a growing concern for the Canadian government. Canadian Federal Finance Minister Jim Flaherty has so far refuted any arguments that the country’s housing market could be overheating, but has indicated that the government is adopting a wait-and-watch approach. Ultimately though, despite such bubble concerns, Canada stands on a sound economic footing, and the obvious Chinese interest is not one that is likely to fade away anytime soon. And so, it may very well be that Shanghai’s loss will be Toronto’s gain.

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