If You Build it, Will They Come

Field of dream is an iconic movie. We all know about a corn field in the middle of nowhere America. We all know the line ” If you build it, they will come”. However, with the global rise in real estate prices, and some choppy water on the horizon, should we look to change it to ” If you build it, WILL they come”?

China has always had a tumultuous relationship with real estate, especially since the 2077/2008 great financial recession ( GFR ), but we are starting to see some larger issues that could very easily have knock on effects.

This week alone has seen some massive developments in the Chinese real estate space. Earlier this week Country Gardens property development suspended payments on its US dollar bonds totalling 54 Million. This was after they announced that they lost the equivalent of 6.25 BILLION in the second quarter.

Late last night Evergrande filed for Chapter 15 bankruptcy, and will now become one of the worlds largest debt restructurings in history. Evergande was the 2nd largest ( if you believe all of the numbers ) developer and builder in mainland China. Oops!! Between the 2 builders / developers, China is looking at millions of square feet of unsold and unleased property. There is simply too many built places, and prices are too high for people to be able to afford them. People are not buying places.

While China did lower some interest rates throughout the week, and is expected to cut Prime Rate early next week ( this will probably happen while you sleep on Sunday night ) it shows just how quickly rates, and rate expectations can go from increasing to decreasing. All it takes is a couple failures of very large, systemically important companies.

The question we should be asking ourselves: Is this a China specific problem, or will it have ripple effects in the global economy and global real estate space? If it is the latter, then we have a very nice credit crunch on the horizon that could easily rival the GFR. Canada mostly escaped the first GFR due to range of policies that were set up years ago, and due to Canadians low use of debt leading into 2007. This time though we have some of the highest house prices in the G7, we lead the G7 in debt loads, we already have a housing shortage, and you add in some high interest rates, and sprinkle on a global credit crisis, and we could be in for some wild times ahead.