December 20, 2016 / 1:50 AM / 8 months ago

Fitch: China Housing to Cool, but Caution over Mortgage Growth

(The following statement was released by the rating agency) SHANGHAI/HONG KONG/SINGAPORE, December 19 (Fitch) [Fitch Ratings expects China's housing market to cool in 2017 as government measures play a role in easing mortgage lending growth and dampening price rises. However, we still believe growth in mortgage lending could continue to add to risks in the banking sector - with fast-growing, mid-tier banks the most vulnerable. We expect tighter property-market regulations to restrain investment demand in higher-tier cities, contributing to a fall in housing sales of 15% in 2017, following record growth of around 40% in 10M16. A sharp correction in prices is unlikely, but we expect only a small increase in Tier 1 cities, compared with a 24% gain in the first nine months of 2016. Price rises are likely to be even smaller in lower-tier cities - where destocking was marginal in 2016 and did little to bring down developers' large inventories. Mortgage lending is likely to slow next year, in keeping with the general cooling of the property market. However, banks will retain a strong appetite for providing mortgage loans, which they view as relatively safe assets in terms of collateral protection. We still expect outstanding mortgage balances to grow faster than incomes in 2017, even if the estimated 33% growth seen in 2016 is unlikely to be sustained. Residential mortgage loans have become a key driver for Chinese banks' loan growth since 2015. Household loans - the majority of which are residential mortgage loans - contributed 47% of total new loans in 9M16, up from 31% in 2015. Fitch believes credit risks in the banking sector will increase if rapid growth in residential mortgages continues. The household debt-to-income ratio continued to rise in 2016. Household leverage is still not high by regional or global standards, but further increases could potentially create medium-term repayment risks. Banks relying primarily on property values to support new mortgage loans will become more vulnerable to changes in debt-servicing dynamics, especially if property prices fall. Competition among lenders to sustain growth in their mortgage portfolios has the potential to put pressure on underwriting standards. Furthermore, anecdotal evidence shows some down-payments are being funded by other parties - such as non-bank lenders, businesses, and families. Loans are not as safe as loan-to-value ratios would imply when this happens. State banks have traditionally dominated mortgage lending, but some mid-tier banks have become more aggressive since 2015. Fitch sees higher risks in the mortgage loan books of these faster-growing banks, reflecting their generally higher risk appetite and less sophisticated risk controls. For more details see our report "Asia-Pacific Banks Chart of the Month - December 2016", available at www.fitchratings.com or by clicking the link above. Contact: Jaclyn Wang Associate Director Financial Institutions +86 21 5097 3038 Fitch Ratings (Beijing) Ltd. Shanghai Branch 3401, 34/F, Shanghai Tower No. 479, Lujiazuihuan Road Shanghai, 200120, China Hilary Tan Director Structured Finance +852 2263 9904 Su Aik Lim Senior Director Corporate Finance +852 2263 9914 Dan Martin Senior Analyst Fitch Wire +65 6796 7232 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Related Research Asia-Pacific Banks Chart of the Month - December 2016 here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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