Emerging Trends: Canada’s Housing Bubble Bursting, China Export Deflation

Summary

• Canada’s housing bubble is bursting. Inventories are rising, negatively amortizing mortgages are piling up, and amid falling sales and record construction pipeline, developers are cutting new starts.
• Asian exports are back in black, though growth is mainly in tech related goods – not a general turnaround in goods.
• Chinese export prices have plunged 20% YoY. Volumes are stable. So it is a price war. That is helpful for goods disinflation in DM.
• NVDA extends its lead over rivals as data centre demand for chips rise 200% YoY.
• Hungary is turning to retail bonds to fund fiscal slippage.

Canada’s Housing Bubble Is Starting to Burst

• Housing bubbles are pronounced worldwide. The UBS Real Estate Bubble Index, composed of five standardised indices, placed Toronto, Canada, top of that list through 2022.
• Property prices are starting to fall but remain well above trend.
• Inventories are rising, albeit from low levels. But with sales weak and record construction in the pipeline, new starts are down YoY (Chart 2).
• Bank regulators are concerned about the rising share of floating rate mortgages and incidence of negative amortizing mortgages, and they are forcing banks to increase loss provisions.
• This may not be all bad. Canada needs more housing, as the bubble was formed due to insufficient supply. So higher supply and lower prices are great for future affordability and are consistent with authorities’ goals (Canada’s Housing Action Plan).
• But bubbles rarely pop in an orderly fashion. The adjustment process could turn more painful for consumers and banks, forcing BoC to pivot sooner rather than later.

Asian Exports Return to Growth

• Export growth in Asia is picking up, with Korea, Taiwan and Vietnam leading.
• Low base effects are flattering YoY comparisons, but the trend has improved in level terms as well (Chart 3).
• The recovery is concentrated in ICT goods (Information & Communication Tech), thanks to AI-driven demand for high-end chips and continued tailwinds from strong automobiles, especially EV production.
• Since these countries are specialized in the manufacture of these goods, this may be a story of relative outperformance, rather than a general turnaround in goods trade.

China Cutting Prices to Hold Market Share

• China’s export price index fell by 20% YoY in October, the steepest decline in at least 20 years. China is not alone in cutting export prices, but it is certainly the most egregious.
• Chinese exporters gained global market share after the Covid-19 pandemic. While cutting prices may be a business strategy to maintain market share in some industries like EVs, we think the real story is that this is a symptom of oversupply.
• Government policies have been geared toward supporting production and investment, while households are maintaining high precautionary savings. This is causing supply to outstrip demand.

Contrasting Retail Bond Issuance in CEE

• Hungary’s fiscal slippage has prompted a renewed surge in retail issuance this year as the debt management office looked for alternative sources of financing. This year’s budget deficit target has been revised to 5.2% GDP versus an originally planned 3.9%, while recent EC forecasts see the deficit reaching 5.8% GDP.
• The AKK’s 10% increase in retail issuance YTD has gone hand-in-hand with declining bank deposits as households diverted savings to the government, helped by a marketing campaign highlighting the better rates on offer.
• In contrast, Polish retail bond issuance has dropped back after the recent spike despite what we estimate as the largest fiscal impulse across CEEMEA this year. With inflation not expected to back at target in the coming quarters, issuance of 3-year fixed rate savings bonds has increased sharply.

Soaring Investment in Data Centre Chips

• Ever since ChatGPT took the world by storm, companies have embraced the training of AI models and tried to incorporate generative AI into their internal workflows and customer-facing applications.
• AI training and inference demand extensive computing resources. This has led to a significant surge in AI GPU sales, straining supply chains globally. Even OpenAI faces challenges in securing sufficient GPUs, impacting its near-term goals.
• Meanwhile, Chinese companies have been investing to deploy their own LLMs while stocking up on US GPUs ahead of increased sanctions.
• NVIDIA emerged as the clear winner by committing to AI GPUs in 2017, while competitors like Intel and AMD have lagged. AMD, their closest rival, gained share from Intel with their MI250 chip, despite its higher cost.
• However, compared to NVIDIA, they significantly lagged, with the MI250 chip found to be only 80% as fast as Nvidia’s A100 chip (used by Chat-GPT). NVIDIA has widened its lead with its H100 chip, and the CUDA software ecosystem which enhances consumer lock-in. According to Raymond James, Nvidia spends around $3,320 to manufacture an H100 GPU, with retail prices ranging between $25,000 and $40,000.
• NVDIA’s recent results show that data centre GPU sales have soared to $14.5bn in Q3, from under $4bn last year, an increase of over 270%. Over the same period, sales growth at AMD has been flat, while Intel has seen sales fall 10% (Chart 10).
• Looking ahead, we expect this rapid growth to persist. But there are three things we are watching:

1. The impact of competition from AMD, Amazon (Inferentia and Trainium), and Google’s (TPUs) on NVIDIA’s market share going forward. Presently, we estimate NVIDIA holds approximately 70% market share among chip providers (Chart 11).
2. The extent to which the decline in Chinese GPU sales will affect NVIDIA in the future. Currently, China represents around 20% of data centre sales.
3. Whether NVIDIA’s investment to rapidly expand GPU production will result in over-supply down the line.

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