• FT Confidential Research’s monthly gauge of discounted mortgage rates suggests house price growth is likely to slow in coming months.
  • Our data shows credit tightened further in May as a government campaign to clean up the financial system drove up borrowing costs in the interbank market.
  • At the peak of the previous tightening cycle just 2.3 per cent of developers reported mortgage discounts. The government may not want to tighten that much during this cycle.

Tighter onshore credit conditions suggest Chinese house price inflation has further to fall. Our monthly measure of credit for first-time buyers found a steep drop in the availability of discounted mortgage rates in May (see chart).

At the peak of the latest housing boom, 56.4 per cent of developers reported first-time buyers could get discounts. That fell to just 28.1 per cent in May. Changes in credit availability are a leading indicator of house prices and suggest the slowdown in house price inflation, shown in year-on-year price changes tracked by the National Bureau of Statistics, has much further to go.

The fall in credit availability tallies with mainland media reports of banks reducing or even removing mortgage rate discounts. Mortgage lending has become increasingly constrained by administrative curbs and by government moves to tighten borrowing activities in the interbank market.

Money market rates have surged in recent weeks as banks scramble for liquidity in the interbank market, reaching levels that suggest banks are facing a margin squeeze, forcing them to raise rates. The scramble may be most intense among smaller, deposit-light lenders, but the government’s deleveraging campaign has also driven some corporate borrowing back to the banking system as traditional shadow finance channels close off and bond financing gets too expensive.

This could be squeezing out households. May’s lending data from the People’s Bank of China (PBoC) showed medium- to long-term household loans — a proxy for mortgage lending — down 18.1 per cent year on year to Rmb432.6bn ($63.7bn), below the Rmb482.5bn average over the previous six months. These loans have accounted for 37.4 per cent of total bank lending so far this year, versus 53.4 per cent during 2016 (see chart).

Tightening, with limits

The government has said it is using a window of opportunity opened by a stable economy to push deleveraging in the financial system. As evidence mounts of slowing activity, particularly in the housing market, we expect pressure to build on the authorities to temper this push. The PBoC earlier this year talked up the need for “reasonably fast” mortgage lending growth, noting its positive spillover effects.

Furthermore, our Consumer Index highlights the “feelgood factor” generated by surging house prices across the country. Prompted by government stimulus, the housing market took up much of the slack created by the stock market’s collapse in mid-2015. Our latest read of house prices indicated they barely rose in first-tier cities in May. As well as directly heightening default risks, outright house price falls risk creating a negative wealth effect among households.

If nothing else, an ongoing Communist Party reshuffle, culminating in the 19th Party Congress later this year, necessitates a stable growth environment.

Although the authorities have frequently found themselves behind the curve in adjusting policy, we do not expect this tightening to be as sharp as in 2014, when just 2.3 per cent of developers reported that buyers were getting discounts on their mortgage rates.

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. Our team of researchers in these key markets combine findings from our proprietary surveys with on-the-ground research to provide predictive analysis for investors.