Chinese property prices soared in 2016, particularly in large east coast cities.
Boosted by relaxed purchase restrictions and a series of interest rate cuts in 2015, along with a degree of speculation, they’ve been running hot, dragging industrial metals and bulk commodity prices along for the ride.
In October, growth in new home prices slowed sharply.
This chart below from the Commonwealth Bank reveals just how sharp the deceleration has been, particularly in first and second-tier cities, the largest and economically most important in the country.
It’s suddenly stalled in larger centres, quashed by a raft of policy measures introduced to cool price growth in the hottest of hot housing markets.
“The slow-down in new home price growth in China last month is largely a result of policy, as authorities look to make purchasing property more difficult to curb rising house prices,” said Vivek Dhar, a mining and energy analyst at the CBA.
“Restrictions were implemented by almost two dozen cities in late September.
“China’s banking regulator has also got involved, telling banks to review their mortgage lending and property development loans,” he adds.
As the chart shows, price movements in large tier-one cities have acted as a lead indicator for those in smaller Chinese cities.
Where they go, prices in smaller cities tend to follow.
Given that relationship, and the recent deceleration in price growth in tier one and two cities, the question many are now asking is whether that will translate to a price slowdown, or worse, in smaller Chinese cities in the months ahead.
To Dhar, if it does, it could see base and bulk commodity prices come under renewed pressure given their importance to Chinese commodity demand.
“The risk to commodity consumption is if these policies end up aggressively slowing price growth in tier 3 cities and below,” he says.
“With Chinese floor space sales slowing last month, we could see Chinese commodity demand and global commodity prices fall by year-end if policy makers press too hard.”
According to Dhar, smaller Chinese cities accounted for around 80-90% of total new property construction during China’s previous fiscal stimulus program that began in late 2008 in the wake of the global financial crisis.
Then, like now, what happens in those property markets will likely determine what will happen to commodity prices and demand as we head towards 2017.
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