OREANDA-NEWS. Sales of commodity housing in China are near a cyclical peak, Fitch Ratings believes, with sales in the 12 months to June 2016 reaching a record-high 1.25 billion square metres (sqm) of gross floor area (GFA).

Sales volume is likely to fall due to regulatory tightening in some markets, but the decline is likely to be gradual as China's credit environment remains accommodative in the near to medium term. In the long run, Fitch expects commodity housing sales volume to decline to a more sustainable level.

Favourable demand factors and ample supply have supported the robust 17% increase in sales in the 12 months to June 2016 from the same period a year earlier. This sales volume is also 67% above the 750 million sqm that Fitch sees as a long-term sustainable annual sales level (see Fitch's special report China Residential-Property Market Forecast (2016-2030), dated 7 August 2016). Easy credit, supportive home ownership policies, and the much lower prices in the majority of the lower tier cities compared with Tier 1 cities have stimulated demand this year. At the same time, excess inventory in most Chinese cities allowed the surge in demand to be easily met.

We believe some of these supportive factors will run their course in the near to medium term. Housing prices have risen significantly in the larger Tier 2 cities and in response, local governments are tightening home purchase restrictions and mortgage policies to dampen demand. Residents living in the large stock of homes built before 2000 totalling 10 billion sqm belong to the discretionary home upgraders group, and they are likely to have strong demand elasticity. They may speed up or delay buying decisions depending on market conditions. Therefore, the fall in housing sales is likely to come from this group as tighter supply in the higher-tier cities have driven up housing prices and pushed this group of buyers to the sidelines.

Housing developers have been drawing down on their land reserves instead of buying new plots, with land sales in decline since late 2014. This means housing sales growth will have to slow eventually unless the developers replenish land at a faster pace than they are selling homes (see Fitch: Positive Rating Action Unlikely from Chinese Homebuilders' Strong Sales, dated 18 August 2016).

However, we do not expect a sharp drop in housing sales volume because the Chinese government still has policy tools, including further loosening of its credit policy, to stimulate demand, especially from discretionary upgraders, and to smooth out sharp volume and price volatilities. While developers' access to external funding is subject to window guidance, their liquidity risk is manageable as many have extended their debt maturities till 2018-2019 via domestic bond issuance in the last 12-18 months. Mortgage policies, despite some tightening in Tier 2 markets, remain largely accommodative for home buyers.

A more prolonged and sharper decline in housing sales volume towards our long-term sustainable level will likely be a result of a structural shift in China's credit cycle. The risk of this happening in the next 12-18 months is still low.