After a tough two years for China’s property sector, things have been picking up of late.
On the back of lower interest rates and a relaxation of property investment rules, prices have been rising, and not only in major cities.
The chart below, supplied by Vivek Dhar, a mining and energy commodities analyst at CBA, reveals the recent trend in Chinese house prices.
By median value, house prices rose by 1.4% in large tier one cities in December, outpacing a gain of 0.3% for smaller tier two cities and flat growth in smaller tier three and four cities.
On the surface, it’s an encouraging development, particularly in smaller cities given the huge glut of unsold properties that have weighed on prices in recent years.
However, while prices have been either increasing or stabilising over the past six months, the pace of growth has been slowing.
Dhar suggests that the recent moderation in house price growth “has reignited risk that China’s property sector may retrench again”, suggesting that the outlook for residential construction, hence commodity demand, will remain weak in the year ahead.
“With construction a strong driver of China’s commodity demand and tier 3 and 4 cities accounting for 80-90% of total new construction, we likely need to see prices supported in lower-tier cities to encourage commodity demand,” says Dhar.
While prices in smaller cities have stabilised in recent months, whether that can be sustained remains debatable.
“Given a property inventory overhang of two to five years in lower-tier cities and China NBS reporting the number of unsold new homes nationwide increased 14% to 437 million square metres as at 31 October, inventories are likely to remain a problem for China’s property sector,” says Dhar.
“With China still focusing on transitioning its economy towards consumption and services, we think construction and commodity demand will remain weak in 2016.”
Although the property glut in smaller Chinese cities is not a new phenomenon – it has been in place for several years and has weighed on commodity demand, hence prices – it is showing little sign of dissipating.
Coupled with a continued uplift in commodity supply – partially in response to the huge surge in construction of past years that led to the glut today – it’s little wonder why so many remain downbeat on the prospects for commodity prices in the years ahead.
NOW WATCH: Money & Markets videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.