Chinese government's plan to build 36 million government-financed affordable housing units by 2015 helps support pick-up in demand for West Coast logs, lumber, but prices are below 2011 peak

DUNEDIN, New Zealand , March 2, 2012 () – The Chinese government is attempting to orchestrate a housing-market situation in 2012 that is unheard of in the Western world: a reduction in house prices to balance out excess housing stocks in the short-term, in combination with a massive expansion of the number of “affordable” housing starts (mainly through government-financed low-cost housing) to accommodate a long-term plan to meet rapid urban population growth.

The key objective of the Chinese government’s five-year plan is to make new housing units (mainly apartments) more affordable for the average Chinese family, by increasing construction of government financed/subsidized (“affordable”) homes throughout China, while at the same time implementing new policies to reduce prices on the excessive inventories of new and existing homes. In a free-market economy, this is a virtually unheard-of feat; normally, falling house prices are an indication of supply exceeding demand (at given market prices), resulting in a decrease in housing units and often leading to a significant and sometimes long market correction as buyers stay on the sidelines until house prices have reached a bottom.

The new housing policy directives, implemented gradually during 2010 and 2011, began to have a noticeable impact in the third and fourth quarters of 2011. The question on the minds of major log and lumber exporters to China is whether a command economy like China’s can achieve what a free-market economy cannot even contemplate. With continued sluggish housing starts and soft lumber markets forecast for the U.S., and fragile lumber markets expected for Europe in 2012, any change in Chinese demand is bound to have a major impact on global log and lumber prices.

Although China’s implementation of the policies and initiatives detailed above would normally instigate a major house-price correction accompanied by a decline in construction, the government’s very aggressive plan to build 36 million government-financed affordable housing units from 2011 to 2015 is designed to mitigate these impacts. This plan will cause the private real estate development sector to undergo a serious downturn and consolidation in 2012, such that total housing starts and demand for building materials will be heavily supported by government construction in 2012 and 2013. The number of units built during 2011–2013 will be key to determining the overall impact on building products’ consumption and overall economic growth.

The beginning of 2012 has seen a return of Chinese demand for West Coast logs and lumber. Although prices are much lower than at the peak in 2011, it is encouraging that buyers have returned to the table. This is hoped to be a sign that China’s central government can successfully engineer its ambitious economic targets. If it does, the outlook for new housing starts, and therefore wood consumption, looks very optimistic indeed for the next four years.

Source: International Wood Markets Group, www.woodmarkets.com

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