Housing prices are looking much better after significant declines over the last year. Housing sales rebounded in April. Those two data points where some of the only positive news in April's ugly economic numbers.
Construction and housing sales have been negative most of the last year after significant oversupply hit the market early in 2014. This is potentially good news for future growth prospects. Housing has been a huge drag on many sectors of the economy recently.
But, construction remains soundly in the negative. New construction is still declining, and we won't see a pick-up in heavy industry until construction rebounds.
So, if housing sales are indeed rebounding, how much longer until we see developers increasing construction activity? About 6 months is the historical time frame in which sales lead new construction, as seen in the chart below. Housing will probably be a drag on the economy until the Fall.
Important things to note about housing and why you should pay attention to it:
- By most estimates, the property market in China constitutes 25% of the economy.
- Property is a significant source of household investments due to the lack of financial investment alternatives. Real state is over 65% of household assets. There is a significant wealth effect from housing prices flowing through to consumption. Changes in housing prices = future changes in consumption.
- Debt is not a problem for homeowners (household debt is only about 35% of GDP).
- Almost half of steel production goes into construction.
- Housing demand is around 7.5 to 8 million units annually, and supply 8.5 million. Oversupply, yes, but only modest downside risk for current production.
- Estimates put urban housing vacancy rates at roughly 20%, compared to 18% in Japan and 2% in the US.