Chinese house prices continue rising no crash in sight

We first highlighted the improvement in Chinese house prices in November last year (see our note titled “Chinese house prices stabilise, western provinces capture our attention”) In our note we said “Many traders have overlooked the huge potential in second and third tier city development, perhaps the housing numbers are starting to signal an important investment trend for China in 2013.”

The trend continues. According to Reuters calculations based on official data published today, average new home prices in the 70 major Chinese cities surveyed gained by 2.1% in February when compared to the same period last year. The monthly gain was 1.1% and the trend now shows rises for seven of the last eight months. The gains have been largest in well established cities like Beijing where new home prices added 5.9% in February alone.

The data confirms the need and desire by policymakers to contain the housing sector. However what needs to be noted is the overall health of the Chinese economy is starting to suggest a big turnaround in sentiment. While most of 2012 was a period of consolidation, the recent leadership transition seems to be paving the way for a new wave of confidence, as reflected in house prices particularly in the most well established cities.

This shift has not yet been reflected in official PMI numbers, or in base metals like copper. The copper price continues to tumble and in line with our comments last week, should find solid support at around US$3.30/lb. Iron ore seems to be stabilising at around US$130-135 per tonne but could slip back to around US$120 where there will be support. Commodities have been weighed down by news around government measures to curb price increases, but many traders have missed the point that prices are rising because the Chinese economy is improving.

With such limited investment choices for ordinary citizens in China, the government can only contain real estate prices rises by so much. Eventually the confidence will spill over into business investment and PMI numbers. Copper, nickel and iron ore will be major beneficiaries from very low levels. Supply needs to move before prices. It might be too early to call the bottom with LME copper stock piles now at around 500,000 tonnes, but the signs are there that Chinese PMI has the potential to turnaround in the second half of this year.