China’s property sector
China’s property sector remains critical to iron ore demand. Investors in iron ore companies such as Rio Tinto (RIO), BHP Billiton (BHP) (BBL), Vale (VALE), and Cliffs Natural Resources (CLF) should keep an eye on developments in China’s property sector. Cliffs forms 3.5% of the SPDR S&P Metals and Mining ETF (XME).
China’s government has taken a number of steps to kick-start the country’s property sector investment in order to support other sectors. These steps include cutting taxes on home transactions, easing mortgage down payment requirements, and cutting interest rates. According to the latest property sector figures, these efforts have started showing results.
Real estate indicators
- The total floor area under construction (in square meters) by Chinese real estate development enterprises rose by 6% in the first five months of 2016. This growth rate rose by 0.2 percentage points compared to the first four months of 2016.
- In the first five months of 2016, building sales rose by 50.7% YoY (year-over-year) in China. However, the growth rate fell by more than 5 percentage points compared to the first four months of the year.
- China’s new construction starts rose by 18.3% YoY in the first five months of 2016 after steadily falling for two years, as we can see in the graph above. However, this growth rate fell compared to the first four months of 2016.
Can the property sector sustain growth?
The property sector has been improving steadily in the last few months. However, this improvement has mainly been the result of supportive measures from the government. Underlying demand has yet to pick up to support the property sector.
Unsold property inventories are still high. According to Bloomberg, the recovery in home prices in May 2016 abated somewhat after the government put curbs in some economic centers. This lack of underlying demand worries analysts regarding the longevity of investment growth in the sector and the rally in home prices.
The recent spur in the Chinese property sector has also been due to the cheap financing that’s available. In the next part of this series, we’ll look at this in greater detail.