Research shows China’s soaring housing prices actually support tanker firms

China Real Estate Sales and Floor Price 2013-06-25Enlarge GraphContinued from Why China can contain financial crisis and support oil demand for tanker stocks

Real estate and China’s economy

The real estate sector is a crucial part of a country’s economy. While it makes up ~13% of China’s GDP, its significance is larger, as it interconnects with other parts of the economy, which affects oil demand and tanker companies. Just as the U.S. economy has historically recovered along with the housing market, solid economic growth in China must be supported by high real estate purchases, construction, and development.

China’s real estate sector

Building sales in China have remained robust, growing 52.75% year-over-year in May 2013. Housing prices (measured in price per square foot of floor space sold) also grew, at a high rate of 12.65%. Growth in prices has fallen from the peak of ~19% this year, as the government tried to cool the property market down to prevent a bubble through the restriction of credit to individual buyers and the imposition of a capital gain tax on sellers.

Analysts have expressed that high real estate prices will restrict looser monetary and fiscal policies to support economic growth. But is this really something to worry about? A look at land areas purchased indicates that developers are showing interest in purchasing more land. In May, year-over-year growth in land area purchased stood at -13.10%. While lower than the -8.60% seen in April, the May number is higher than what we saw at the second half of 2012.1

China Real Estate Activity 2013-06-26Enlarge Graph

Economic growth 

Furthermore, land purchases have led construction activity in the past. This makes sense because high housing prices attracts developers to purchase land to construct buildings for sale. Although growth in floor space under construction tapered off slightly since March 2013, it has remained above the levels seen during the second half of 2012. This means that if we continue to see positive development in land purchases, construction activity should also rise. If history is a guide, land purchases and construction activity should continue to grow positively. From the end of 2008 to the end of 2009, building sales and prices also rose to a record level (see the two charts above). Sales and price growth fell after, as the government curbed speculative activities, while construction and land purchase growth continued higher.

Thus, even though rising housing prices are a concern for the government and recent financial woe dragged tankers down (see Must read: Financial woe abroad drags tankers down, outlook negative), the government has the option to take a looser monetary and fiscal policy stance to stabilize the financial sector and support the economy—if it wants to. The current low inflation rate also supports this view (see Why China can contain financial crisis and support oil demand for tanker stocks). This action would be positive for tanker firms, which are becoming much more dependent on China these days, as the move would support oil demand and shipping rates (see Tanker rates to remain depressed, negative outlook ahead). Some examples of these stocks include Teekay Corp. (TK), Tsakos Energy Navigation Ltd. (TNP), Ship Finance International Ltd. (SFL), and Teekay Tankers Ltd. (TNK). The Guggenheim Shipping ETF (SEA), an ETF that invests in all the companies mentioned, will also benefit.

But in the short term, more monetary stimulus is doubtful, as the government’s policy stance objective has changed. Read on at Overall housing prices are becoming cheaper for Chinese, positive for tankers.

  1. Analysts use year-over-year growth because the market often moves when the outlook gets better or worse rather than whether it’s good or bad.