Estimating the leverage condition of China’s Urban households: evidence from the housing sector

The large and increasing debt in China has attracted global concern, but there is currently little quantitative information available on the leverage condition of China’s housing sector. In this study, we suggest the current loan-to-value (LTV) ratio of housing as the key indicator of households’ leverage condition and develop a method to estimate the city-level ratio wholly based on macro-level statistics. The results from 40 major cities suggest that, on average, the current LTV ratio was 57.3% at the end of 2017 in the most vulnerable scenario, and only 18.4% if we adopt the actual scenario. This finding suggests that, in general, the leverage of China’s urban household sector is still in the relatively safe range. However, a few cities, such as Wenzhou, witnessed a high current LTV ratio of over 100% due to a housing market crash. Based on manually collected city-level delinquency data, we also provide empirical evidence that our current LTV indicator can at least partially explain the change in housing mortgage loan delinquency rates and can thus serve as an important indicator of systemic financial risks associated with the household sector.