China's Housing Boom 2.0 Continues. Construction Activity Improves.

China's housing market continues to boom as Beijing stepped-up support for the sector, and money was diverted away from stocks and into property after recent market turmoil.  The big change so far this year seems to be the improvement in construction activity.  After over a year of contraction in construction dragging down overall growth, the surge in house prices and sales have potentially spread to new housing starts and real estate investment.    

China's housing policies have been very supportive recently.  Last month, Beijing dropped the minimum required down payment on mortgages for first-time homebuyers to 20% from 25%.  That minimum was lowered last fall from 30%.  Down payments for second properties were reduced to 30% from 40%.  Combined with PBOC easing, the result has been a 22% rise in mortgage lending.  China’s mortgage market is relatively underdeveloped, comprising only 13% of all property investment.

The housing market gains have been driven by the top tier cities, as lower tier cities - where excess inventory stands in the form of massive ghost towns - are still seeing downward price pressures. 

Construction activity declined in 2015 and much of 2014 as a result of slowing investment.  Developers have been slow to build in a market swamped by empty properties constructed in the years following China's massive post-financial market stimulus free-for-all.  

2015 was a reversal of that trend.  New housing units completed declined 8.8% from 2014, roughly 1.2 million housing units fewer.  Residential property sales boomed towards the end of last year, ending up 6.9% higher than the previous year, roughly 1.2 million units more than 2014.  2015 was the first year in many where demand possibly outstripped supply.  So far this year, house sales are over 30% higher than last year at this time.

The dip in housing inventory, combined with Beijing policies to boost mortgage lending, central bank easing lowering borrowing rates for developers, and money diverted away from stocks may prove to be a short-term boost for housing and construction.  That would give some relief to the pain felt in construction related industries, like steelmaking and cement, that are being forced to reduce overcapacity.