The Year of the Yuan Not Looking Good For Canadian Real Estate

Well, readers of this blog and a handful of other news sources knew this well in advance.

The People’s Bank of China (basically the government) imposed new restrictions for 2017 which will have huge implications on BC, Canadian and North American real estate prices.

The long and short of it is that they have cut off the supply of hot money and they will do so more aggressively as things deteriorate in China.

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This article does a great job of explaining it in full. However, I will give some highlights from it with a handful of points below. There is no doubt this will have huge implications going into the May 9th elections in BC and for the future of this Province.

We did not have nor do we have a strong or hot economy. We do have a hot money economy. That’s it. That is not an economy but a glorified roulette wheel which always end in tragedy. A tragedy that has been unfolding for years but no one cared because the well never ran dry. Now, the well has been emptied and there is no water left.

Capital controls will ensure the well stays dry for a long time:

 

Bloomberg summarizes the key elements of the latest set of FX conversion requirements:

  • Customers must pledge money won’t be used for overseas purchases of property,securities, life insurance or investment-type insurance. While such rules aren’t new, citizens previously didn’t have to sign such a pledge
  • Customers must give a more detailed account of the planned use of funds, such as business travel, overseas study, family visits, medical treatment, merchandise trade or purchases of non-investment insurance policies, including the timing, by year and month
  • Violators of foreign-exchange rules will be be added to the currency regulator’s watch list, denied foreign-exchange quota for three years and subjected to anti-money-laundering investigations
  • Customers must confirm compliance with restrictions on money laundering, tax evasion and underground bank dealings

I am sure many will point to the ‘while these rules are not new’ component of the above. However:

Ultimately, however, it just may be that the unprecedented rollout of capital controls is finally forcing the Chinese to keep their funds at home. As Nomura’s Zhao said, restrictions on use of foreign exchange limited anyone’s options and so acted as a disincentive anyhow.

“You can’t buy real estate. You can’t purchase anything. Basically you can only park that FX in your deposit account onshore with interest rates that are very low,” he said.

Some of you will know the main components of getting money out of China. They are the same things that, throughout history have driven money out of one place to another for centuries.

1. Lack of confidence in the domestic economy which is much worse on the streets than what the government tells people (sound familiar)

2. Potential increase in returns on capital in another country (Foreign Real Estate, Stocks, Bonds)

3. Rapidly or slowly declining value of currency compared to place where returns can be made (Chinese Currency vs US Dollar etc.)

The fact the government was letting the money out, knowing full well how bad it was for many was a shocker.

I still hold to it that the Chinese government knew this, yet let it happen. For years this has been going on. For years it has been bad. Perhaps they wanted people to get some money out to not over inflate their own housing market bubble, which, just like Australia and USA has popped.

I mention those 2 countries because we can draw many parallels to them in our own country.

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Massive RE increases, debt load increases literally to the top of the financial crash of ’08 and then declines, commodity based economies and of course low rates which made it easy for people to borrow. (domestic hot money) Keep in mind the numbers in the two charts above are way ahead of what the USA was in the ’08 crisis.

Now those rates are rising and we are seeing the effects of even tiny rate increases on real estate prices all over the place.

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We also see the effects on re-financing, new mortgage origination and so on. This will only get worse.

So, the well shuts in the 2 primary areas: Domestic Lending and Foreign Investment (hot money) This is like saying ‘I’m going to remove protein and fat from my diet and build muscle’

The hidden hand element is confidence which again is both foreign and domestic.

The not so hidden hand is of course always the government. Governments don’t really have hands, they prefer tentacles and lots of them.

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Questions everyone in Real Estate should be asking themselves is:

What if domestic buyers that might have been already well priced out of the market but were buying just because ‘that’s what you do’ finally start to say ‘I’m going to wait it out’ or simply say ‘Honey, we can’t afford it now because of the rates’?

What if foreign buyers (not just Chinese) who understand that the high majority of the rise in our properties was strictly hot money from China decide not to purchase because they realize what downward pressure on prices capital controls will cause?

What if current foreign ‘residents’ decide to sell before the decline starts all at once or in a tight timeframe into a rising rate environment and a capital control environment?

Of course we know, there are never crashes in any market throughout the entire history of mankind, so most will ignore that one. 

As trends are typically global (like banning cash) what if the EU and all other places people are scrambling to get their money out of do the same things as China?

Has anyone considered what impact this might have on our banking system? (Hint, I bet the Chinese government saw the impacts of Lehman as a weapon of financial destruction and know full well about this)

Now, if you think I have something against China, you’re wrong, I don’t. This has happened countless times in history, it just happens to be them, as the majority at this time.

I also know they are an emerging empire that will dominate the global sphere more as time goes by, as they have before in history also. This is just empire that ebbs and flows through time. Empires rise in 2 ways, getting stronger or making other empires weaker. That’s it. Not a hard formula. Whether with bombs and guns, legislation or debt. Pick your poison, or in this case, remedy.

Legislation is being added to an arsenal of moves by the Government there. They are building islands to be a choke on trade in the South China Sea. Nothing against it, just a classic empire move.

Legislation always carries with it enforcement. While I am not sure we will see it for sure, if things get squirrely in China, I also think they will go back into past transaction histories of exchanges as they are all electronically logged and start singling people out for even past purchases. But that is conjecture. Let’s look at today:

‘Those who violate rules will be fined 30 percent of the illegal purchase amount and an additional penalty of less than 50,000 yuan (HK$55,795). Violators will also be deprived of their foreign exchange quota for the year when they break the rule and for the following two years, according to the form.

The measures followed said on Saturday that from this month it will step up scrutiny of individual foreign currency purchases and strengthen punishments for illegal money outflows, although the US$50,000 (HK$387,750) annual individual quota will remain unchanged.

Capital outflows have been a growing concern for the government in the past year as it attempts to put the economy back on track and keep the currency stable without exhausting its foreign exchange reserves, which tumbled to US$3.052 trillion in November, the lowest in almost six years.’

So, there you go, it is right in front of you. Everyone is of course able to make their own decisions. We are all adults here. The question is, who pays for the ‘decisions’ made by our governments to let this money in and a collapse in Real Estate prices?

Who will pay when we have another ‘sub-prime’ fiasco on our hands?

Well, the answer to that question is the same as last time. It won’t be the realtors. It won’t be the government who let this money in to prop a primary industry in all our provinces who also benefited by securing 5 year bond purchase at NO INTEREST and land transfer taxes to pad their bankrupt coffers to a little less than bankrupt.

It won’t be the banks who loved the fact that prices were rising which made up for losses on other debt with low interest (government bonds) and could get people into mortgages that they will not be able to pay in 2 years as rates rise.

We both know who will be made to pay, and that is me and you. Sadly, this all could have been prevented but precisely the fact that they know we will pay is why it happens all the time, because we just sit there and take it.

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We have never asked with these record billions PER QUARTER for our money back from the 2008 bailout in the USA or CANADA. So they know it will just go away.

Or will it?

That’s up to us.

PS. Never forget who caused this mess here, strictly and solely so she could do this:

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