China property sales will continue to fall this year and weakness in the housing market will exacerbate debt pressures on local governments and weaker banks, according to a report by Moody's Investors Service.

The international credit rating agency said on Wednesday that the mainland property sector – still teetering under a mountain of unpaid debts, unfinished homes and stagnant sales – will remain soft this year, with negative effects on local government finances.

"Our base case is that property market weakness will persist in 2023, and that the sector's contribution to the economy will remain materially lower over the next few years than in the past decade," said Martin Petch, vice-president and senior credit officer at Moody's.

A prolonged fall in home sales and prices could have serious consequences for local government financing vehicles. That would add pressure on local governments, which saw debts jump 15 per cent to 35 trillion yuan (US$5.12 trillion) last year, according to data released by the Ministry of Finance in January.

Weaker banks are also exposed to property-related loans, and although this is unlikely to trigger systematic banking problems, the central government may need to offer more support, Moody's said in the report.

"China will experience a difficult transition as the property sector is unlikely to regain its role as a major growth driver," Petch said in the report. "These risks could be triggered and magnified by policy missteps and would add to elevated public sector debt."

"Under our downside scenario, resolution costs could be substantial and would be shared among state entities," Moody's Petch said.

Land sales have accounted for more than 40 per cent of the Chinese government's revenue since 2018, according to data from the Ministry of Finance. However, only 4.7 trillion yuan worth of plots were sold last year, down 31 per cent from 2021, according to data from CRIC, a Shanghai-based real estate consultancy.

Mainland developers such as China Evergrande Group, China Fortune Land Development and others have defaulted on loans and abandoned projects in the wake of Beijing's "three red lines" policy introduced in August 2020, which was aimed at reining in excessive leverage and hot money flows.

Beijing has subsequently eased the policy tightening, unveiling a liquidity package last November dubbed the "three arrows" – bank credit, bond issuance and equity financing – along with measures aimed at boosting home sales.

"The change in government policy and the abandonment of zero-Covid will support the mainland property sector and help it perform better this year than the past two years," said Louis Tse Ming-kwong, managing director at Wealthy Securities.

"However, it will take time for the property market to gradually strengthen. It is likely the central government will announce more supportive measures in its key policy meetings in March."

The rescue measures have yet to arrest defaults at big developers such as Times China Holdings, which defaulted on its US-dollar bonds in January.

Housing sales remain weak, with mainland home prices falling for the 16th consecutive month in December, according to official data. Contracted sales by the nation's top 100 developers amounted to 354.3 billion yuan, a 32.5 per cent slide from a year earlier, according to CRIC.

Moody's forecast earlier that property sales would fall 10 to 15 per cent by the end of 2023, while rival ratings agency S&P expects new home sales to decline to 12.5 trillion yuan in 2023.