China’s construction sector enjoyed a renaissance of sorts in the first quarter of the year, snapping the prevailing trend seen in the previous two years.
According to analysis from ANZ’s China economics team, led by acting chief economist Raymond Yeung, construction and property sectors contributed 0.4 and 0.6 percentage points to the year-on-year growth figure of 6.7%, reported by China National Bureau of Statistics.
As the chart supplied by the bank below reveals, in nominal terms property investment also accelerated, growing 6.2% in the 12 months to March.
To ANZ, this suggests “some of the policy easing measures launched last year, such as lowering of mortgage down payment requirements, have started to bite”.
Property prices are growing, especially in larger tier-one cities, and construction activity is ramping up in response.
Yes, it’s all looking good for China’s property sector on the surface, that is, until you look at the mounting glut of unsold properties that continue to litter the country, predominantly in smaller cities.
The chart below from ANZ puts some meat on the bones to demonstrate the reason for concern.
“The destocking of the real estate market is underway, although the inventory level of China still remains high,” says ANZ.
Using its own calculations, including both vacant unsold housing and floor space under construction, ANZ estimates that at the current pace of sales, it will take about 47 months to sell all available housing stock across the nation.
While it clearly won’t happen, at the current pace, construction could cease for almost four years just to clear the current level of unsold inventory — amazing.
The shaded area of the chart above contains ANZ’s forecasts for unsold inventory levels – the bottom of the blue band is the bank’s optimistic forecast for inventory levels, with the top of the band its conservative forecast. The dotted blue line is ANZ’s base case scenario.
“We have constructed two simple scenarios to predict upcoming trends in the property cycle,” says ANZ.
“In scenario 1, we assume that the current pace of sales and new floor space under construction will continue at the same pace seen in March 2016, and the inventory level will return to around 2.1 years by end-2017, similar to the levels seen in early 2010.
“More conservatively, in scenario 2, we assume that the pace of destocking will be similar to the average rate seen during the past six months (September 2015 to March 2016). In this case, the inventory level will remain at around 3.9-4.1 years in 2016, before gradually falling to 3.2 years by end-2017.”
ANZ’s base case is that inventory levels will return to just 2.6 years by the end of 2017, a level akin to those seen in 2010.
Despite only expecting a modest reduction in unsold inventory levels, ANZ believes that the recent rebound in construction activity, along with the surge in new credit extended during the March quarter, will see the PBOC ease monetary policy less aggressively in the period ahead.
“We believe the PBOC will start to ease less aggressively, in light of the strong loan growth and the surge of property prices in Q1,” says the bank.
“Going forward, the PBOC will likely limit the extent of credit growth in the economy. Mortgage lending rose RMB1trn in Q1 2016, representing 22% of total new loans, the highest since 2010.
“While the PBoC will continue to stay accommodative and strive to maintain low interest rates, they will deploy conventional tools like cutting the reserve requirement ratio less frequently,” they say.
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