Evergrande Group, once the world’s largest real estate company, has filed for bankruptcy.
In the latest episode of the Canadian Real Estate Investor podcast, hosts Daniel Foch and Nick Hill delve into the ramifications and explore its potential effects on the Canadian real estate market.
The duo explores key aspects of the Evergrande situation, its historical significance and how it might shape the real estate landscape on Canadian soil.
Evergrande’s significance and collapse
According to Foch and Hill’s research, China’s property sector represents more than half of global new home sales and home building, with a market value of approximately $62 trillion. This collapse raises concerns about managing regional government debts, as many rely on real estate revenue.
Foch and Hill’s analysis
The hosts look at potential outcomes: being “priced in” and the “domino effect.”
Foch introduces the concept of “priced in,” explaining how markets often anticipate and factor events into asset prices before they occur. Applying this concept to the case of China Evergrande Group’s bankruptcy, market participants might have already factored in the potential consequences of this event on financial assets like stocks and bonds.
Hill explores the “domino effect” scenario, where one event triggers a chain reaction of disruptions across markets. In this context, the collapse of Evergrande’s real estate market could potentially lead to broader market turmoil and investor panic.
Negative wealth effect
The podcast also explores the negative wealth effect, where
a decrease in asset values leads to reduced consumer spending. Foch and Hill note that if Chinese investors experience a decline in their perceived wealth due to falling property values, they may become more cautious about spending. This could have a dampening effect on the global economy and potentially influence Canadian real estate markets.
Flight to quality
The hosts also explore the “flight to quality” phenomenon, where investors seek safer assets during times of uncertainty. Chinese investors concerned about the stability of their domestic market might consider investing in Canadian real estate, given its historical stability and well-regulated environment. This flight to quality could potentially drive demand in the Canadian real estate market.
Impact on Canadian real estate
So, considering Chinese investment patterns and potential outcomes, what consequences could Evergrande Group’s bankruptcy have in Canada?
Chinese investors have historically played a significant role in Vancouver and Toronto’s real estate markets. A potential influx of properties for sale by Chinese investors looking to liquidate assets might increase supply. This, in turn, could influence property prices and market dynamics.
Consumer sentiment and mainstream impact
Foch emphasizes that as news about Evergrande’s bankruptcy becomes more widespread, it may impact not only market sentiment but also consumer sentiment on “Main Street.” This mainstream awareness could lead to shifts in overall market dynamics and investor behaviour beyond just the financial markets.
China’s approach and possible impacts
The hosts provided context on China’s approach to the real estate market and its broader economy. They discussed the Chinese preference for a capitalist approach focused on goods and services rather than land ownership. This preference could lead to unique outcomes for China in comparison to other economies facing similar crises.
Listen to the full episode:
