(April 16, 2014) Working Canadians are placing a bet on the Chinese real estate market thanks to the Canada Pension Plan Investment Board that invests their obligatory pension contributions globally. 

By Brady Yauch for Probe International

Taxpayers across Canada are taking their first foray into China’s blistering residential real estate market. The investing arm of Canada’s national pension plan, CPPIB, recently announced that it had formed a new $250 million joint venture with China Vanke – China’s largest residential developer.

Yet, CPPIB is moving into China’s housing market at a time when even the head of China Vanke – Wang Shi – has warned of a housing bubble in the Asian country and that it would be “dangerous” if it lasts. Prices in the country have certainly soared in recent years on the back of – at times – economic growth north of 10 percent. 

Housing prices nationwide surged 140% between 2007 and 2011, while in Beijing, home prices have increased by as much as 800% from 2003 to 2011.

Li Ka-shing, a very savvy and wealthy Hong Kong businessman, also appears to be exiting the Chinese real estate market. A company owned by the family of “Asia’s richest man” recently sold a Beijing property for $928 million (US) and has sold $2.9 billion worth of Chinese properties since August of last year. 

The larger concern is the impact a housing correction could have on the overall economy, which could push the country into an economic downward spiral where job losses and bankruptcies further depress prices. Housing already consumes a third of all fixed asset investment and accounts for about 16% of GDP, according to economists at Nomura. In Canada the housing market accounts for about 7% of GDP. 

Other estimates show that as many as 90 percent of households in a country of 1.3 billion people already own homes. 

Yet CPPIB says that it’s partnership with China Vanke will allow it to better navigate the market: “If they [China Vanke] don’t like the market, they’ll probably see issues long before we’re going to,” Graeme Eadie, senior vice-president of real estate at CPPIB told the Globe and Mail. He added that the venture will avoid the luxury segment of the market – which he says is the most inflated tier – and instead focus on the “middle-income type product.”

Patrick Chovanec, a former business professor in Beijing and expert on China’s real estate bubble isn’t so sanguine. Prices have swelled, he told the Globe and Mail, because Chinese people have made real estate their primary investment purchases.

The result has been a huge escalation of housing prices while thousands of investment units sit vacant in major cities across the country. China is famous for its ghost cities.

“To say there’s lots of demand for housing in China doesn’t mean any valuation makes sense,” Mr. Chovanec said. “And what has happened is the valuations have been propelled skyward by this desire to put money somewhere.”

Canadian pensioners should buckle their seatbelts.

Brady Yauch is an economist for Probe International.