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Why China's next property market drop will be more severe

Growth of mortgage financing means more homeowners will feel pressed to sell

| China
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Residential buildings in Nanjing, China   © Reuters

The fundamentals of China's overheated housing market have been undergoing dramatic change. Unlike in the past, most home purchases over the last two years have been financed using mortgages, rather than cash. Now that Beijing is tightening liquidity, this suggests that the property market could turn down more violently than in past cycles, with potentially ominous ramifications for the broader economy.

Total mortgage debt surged 37% in 2016, but still represented only 24% of China's gross domestic product. The comparable level in developed economies is much higher, leaving plenty of scope for Chinese mortgage lending to keep expanding. In principle, this is good news.

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