Chinese house prices firm again

Late yesterday China released its 70-city house price index and it showed some refirming of prices for January with month-on-month prices at 0.3% and year-on-year at 3.9%:

The number of cities registering gains swung back to positive with 40 versus 30 stable of falling:

The price gains are still very much in lower-tier cities:

There is a bit of a mystery here. Slowing prices have not been strong enough over the past year to stimulate what has been runaway new starts:

Assuming the data can be trusted, a big “if”, I have put the divergence between soft prices and booming starts down to two factors:

• There may be some kind of hidden stimulus at work with developers and local governments under quiet instructions to build to offset pandemic impacts.
• Second, there was a widening gap between starts and completions, suggesting that there is a “pig in the python” here as activity delayed by the pandemic came back with reopening, alongside new contracts, which combined has exaggerateded new starts.

If both are right then we can expect property starts to decelerate through this year as the catch-up growth pulse passes, underlying muted conditions come to bear, and the incipient stimulus tightening takes effect. Recall that authorities are moving on developer leverage:

The “three red lines” policy

• The policy was proposed end-3Q20
• 12 largest developers submitted debt reduction plans end-Sep, detailing how they will reduce their borrowing within one year and to fully meet the targets within three years.
• In early Jan, it was reported in the media that the policy will beextended to cover as many as 30 key developers.
• If implemented, well over half of the combined balance sheet of the entire real estate sector would face material deleveraging pressure over the medium term.
• Caps on banks’ lending to the housing sector. In early Jan, the PBoC/CBIRC announced caps on each bank’s lending to the real estate sector, covering both developer loans and household mortgages.

I can’t see why China would not proceed. Right now steel output is badly overheated, driving the Chinese terms of trade down via huge commodity price gains. Moreover, as developing economies boom out of lockdown, the Chinese export sectors will enjoy fantastic conditions, even as the Chinese consumer also rebounds.

There is simply no need for China to sustain the current level of building to support the economy, not least because the longer it does so the worse the ultimate hangover as resources are misallocated en masse, continuing to build the great debt pile that is slowly but surely killing economic growth.

This is one of the key reasons why I am bearish on iron ore prices moving into H2.