As the saying goes, a picture speaks a thousand words, and the one below is no exception.
Courtesy of CBA, it shows the monthly change in new house prices in China going back three years, breaking the results down by the size of city as determined by China’s National Bureau of Statistics (NBS).
Tier one cities are the largest (think Shanghai, Shenzhen and Beijing), with tier three and lower among the smallest cities by population monitored by the NBS.
If there was any doubt that house prices in larger cities are looking bubbly, they are surely dismissed by the black line which has rocketed higher in recent months.
According to the NBS data, the median new home price in tier 1 cities rose by 3.5% in March, after lifting 2.6% in February. That’s after recording similarly robust monthly growth figures for the best part of a year, according to the NBS survey.
Seems like a healthy, sustainable market, right?
Vivek Dhar, a mining and energy commodities analyst at CBA, notes that the huge increases recorded in larger cities corresponds with a relaxation of property purchase restrictions from Chinese policymakers.
“The government has eased property purchasing rules and lowered interest rates, helping to support China’s property sector,” says Dhar. “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.”
Outside of China’s largest cities, Dhar notes that house prices in smaller cities also accelerated, albeit by a smaller margin. Prices in tier two cities rose by 1.2% while those in tier three and below increased 0.45%.
Although small, the increase in the latter was the largest month-on-month gain seen since January 2014.
To Dhar, this is an anomaly given the huge glut of unsold inventories that exists in smaller cities, clouding the outlook for not only construction but also Chinese commodity demand.
“A property inventory overhang of two-to-five years in lower-tier cities will likely to remain a problem for China’s property sector and weigh on commodity demand,” says Dhar.
“With China still focusing on transitioning its economy towards consumption and services, we think construction demand will remain weak in 2016, but if home price growth returns to China’s lower tier cities, we could see demand strengthen.”