China's rapidly rising housing leverage poses new risks in the event of a housing correction

Though moderating, China’s housing market this year has remained strong.  China's home sales were still up 26.4 percent y/y in the first seven months. Despite the government’s explicit voicing of housing bubble concerns.

The buoyant housing market reflects a clear government intention to encourage the household sector to add leverage which potentially could help the corporate sector deleverage, as part of its strategy to address China’s massive debt build-up as well as to boost growth.

Chinese household sector is relatively underleveraged, compared with the government and corporate sector. Of China’s estimated 250 percent total debt-GDP ratio, around 40 percent is household debt while non-financial corporate sector debt stands at around 170 percent. Hence, stimulating the property market was the governments' natural policy response. A recovering housing market should boost investment and consumption growth and have positive spillover effect for the upstream and downstream sectors.

"Mortgage loans/home sales have risen from around 20 percent in 2012 to 37 percent in 2015 and 56 percent in H1 2016. Surging leverage poses new risks in the event of a housing correction. Experience shows that housing busts preceded by large run-ups in gross household debt are associated with significantly deeper contractions in general economic activity," notes Barclays in a report.