Last week we brought you the news that new home prices in the southern Chinese city of Shenzhen soared by more than 50% in the 12 months to January, a figure that put the likes of New York, London and Sydney to shame in terms of annual rates of growth.
However, while prices are ripping higher in Shenzhen, along with other major Chinese centres such as Shanghai and Beijing, the gains elsewhere in the country are nowhere near as strong, doing little to lift sentiment towards the outlook for construction, commodity demand or a broader housing market recovery in China in the period ahead.
The chart below, supplied by CBA’s mining and energy analyst Vivek Dhar, reveals the monthly movements in Chinese new home prices going back to 2013. While prices in larger tier one cities have recovered strongly since hitting a trough in mid-2014, those in smaller tier two and three cities have barely recovered despite a swathe of new policy announcements from the government designed to support the market.
“The measures have so far proven to be most effective in tier 1 cities, raising concerns that additional support measures may result in a housing bubble in tier 1 cities,” says Dhar in a research note released earlier today.
“While new home prices in China have generally improved in the last year, the lack of price growth in tier 3 cities and below is of concern to us given it accounted for 80-90% of total new construction.”
While some analysts have expressed optimism that a potential rebound in Chinese steel demand could underpin commodity demand in the year ahead, including iron ore, Dhar’s assessment is far more cautious.
“With construction a strong driver of China’s commodity demand, we likely need to see prices supported in lower-tier cities to encourage commodity demand,” says Dhar.
“Given a property inventory overhang of two-to-five years in lower-tier cities, inventories are likely to remain a problem for China’s property sector.
“With China still focusing on transitioning its economy towards consumption and services, we think construction and commodity demand will remain weak in 2016.”