Chinese house price data for January was released on Wednesday, and if you’re looking for evidence that policymakers are winning the war against rapid price growth in the nation’s largest cities, it is surely found in the chart below.
Courtesy of the Commonwealth Bank, it shows the monthly change in new home prices over the past three years.
The cities are ranked in terms of size, ranging from “tier one” — the largest in the country — all the way through to “tier three or below” — at the other end of the spectrum.
And does it tell a story.
Prices, led by the largest centres, have slowed sharply in recent months, coinciding with tighter buying restrictions being implemented by authorities to cool rapid house price growth seen in the earlier parts of last year.
“The slow-down in new home price growth in China over the last few months is largely a result of policy,” said Vivek Dhar, mining and energy commodities analyst at the Commonwealth Bank.
“Authorities are making property purchases more difficult to prevent a housing bubble.
“Restrictions were first implemented in almost two dozen cities in late September. Since December at least 7 local city governments stepped up purchasing restrictions,” he says.
And it’s clear those restrictions are working, even forgiving some scepticism that the scale of the deceleration is far larger than other private surveys.
According to the China’s National Bureau of Statistics (NBS), prices in tier one cities fell by 0.05%, following a slightly larger decline in December. Prices in tier two centres also fell during the month, maintaining the trend seen in late 2016.
Smaller tier three cities bucked the trend, growing at the same pace as seen in December.
While the movements in house prices are being used to gauge potential financial stability risks, for those more interested in the outlook for commodity prices, Dhar says price movements in China’s smallest cities will be a key determinant of demand in the latter parts of the year.
“Price growth in tier three or smaller cities is most relevant for China’s commodity demand,” he says.
“Tier 3 and below cities accounted for around 80-90% of total new property construction following China’s stimulus in 2008-2009.”
Dhar says that a risk to the outlook for commodity demand will be if policymakers attempts to cool the market end up aggressively slowing price growth in these smaller centres.
“We could see Chinese commodity demand slow later this year, helping push commodity prices lower in 2017,” he says.
On the back of efforts to reduce overcapacity in Chinese raw materials producers, along with a rebound in infrastructure and residential property investment, prices for steel, iron ore and coking coal skyrocketed in 2016, more than doubling in some instances.
Given house prices in tier three cities tend to lag movements seen in larger centres, it’s easy to understand why so many expect that the current commodity price rally won’t last.