- Mortgage lending surged in June as widespread expectations that house prices will keep rising continue to fuel demand.
- Although mortgage lending conditions remain loose relative to the last time the government tightened policy, we believe the most intense phase of tightening is now over; the government may be worried about housing bubbles, but it is also concerned about maintaining growth.
A flood of credit to the household sector in June shows the limits of the government's campaign to rein in credit, as well as the grip that rising house prices have on Chinese consumers. We expect mortgage lending to cool in the second half as the authorities try to control financial risk. However, this policy stance will be tempered by the importance of the housing market to China's economic growth.
Monthly loans to households -- a proxy for mortgage lending - rose Rmb127.8bn ($18.92bn) over May to Rmb738.4bn in June, well over 2016's monthly average of Rmb527.5bn. The total in the second quarter was 12.3 per cent higher than the same period last year. While the share of such loans as a percentage of total net new lending fell in June, this was due to resurgent corporate lending (see chart).
Demand for mortgage loans continues to be driven by expectations that house prices will rise. Our latest monthly survey of house price expectations found 64.1 per cent of respondents expecting house prices to rise over the next six months, up from 41 per cent at the bottom of the cycle in March 2015. Of these, 17.4 per cent expected prices to increase by more than 10 per cent. Expectations have cooled only marginally as a result of the government's tightening campaign and have been supported by a large flow of mortgage debt into the household sector (see chart), which was given explicit encouragement by the central bank last year.
As with the previous cycle, government measures to rein in the housing market have included larger down payments and higher mortgage rates, while this time loan officers have been subject to quarterly mortgage loan quotas. As a result, house prices are rising more slowly as credit costs have risen, measured by the proportion of developers in FTCR's monthly real estate survey reporting that homebuyers are getting discounts on their mortgage rates (see chart).
If history is a guide, tightening has further to go; in June, 26.5 per cent of developers reported that first-time buyers enjoyed discounts versus just 2.4 per cent at the peak of the last tightening cycle in late 2014.
Lots of bark, less bite
However, we do not expect policy to become so restrictive this time. Our latest Real Estate Index showed sales continuing to fall across all city tiers in June as markets respond to the local government clampdown. Our survey found house prices in first-tier cities rising more quickly than in May, but still at their slowest pace in nearly four years. In contrast, official June data showed prices unchanged in first-tier cities on a month-on-month basis (see chart).
We believe the most intense phase of the government's tightening campaign has ended. Prices in big cities are no longer rising rapidly. The flow of local government announcements of administrative curbs has dried up, while a closer reading of mortgage rates in our monthly real estate survey found more developers in first-tier markets saying buyers were getting discounts. July's FTCR China Real Estate Index, which will be released on July 28, will show if this is a meaningful shift and whether credit conditions in these markets are becoming more accommodative.
Official rhetoric indicates the authorities are not willing to loosen up on the housing market. The recently concluded National Financial Work Conference identified real estate bubbles as one of seven financial system risks to be prevented.
On the other hand, the PBoC has noted low levels of debt on household balance sheets and identified the importance of mortgage loans in supporting industrial activity. The authorities will be wary of going too far with tightening given the political imperative to maintain stability and deliver on growth. For this, they need a robust housing market.
This article was first published on July 19 by FT Confidential Research.
FT Confidential Research is an independent research service from the Financial Times, providing in-depth analysis of and statistical insight into China and Southeast Asia. A team of researchers in these key markets combine findings from proprietary surveys with on-the-ground research to provide predictive analysis for investors.