China's housing market is expected to cool in 2017 as government measures play a role in easing mortgage lending growth and dampening price rises, ratings agency Fitch said in its latest report.

"However, we still believe growth in mortgage lending could continue to add to risks in the banking sector - with fast-growing, mid-tier banks the most vulnerable," the report said.

The report forecast that tighter property-market regulations will restrain investment demand in higher-tier cities, contributing to a fall in housing sales of 15 percent in 2017.

A sharp correction in prices is unlikely, but only a small increase is expected in Tier 1 cities, compared with a 24 percent gain in the first nine months of 2016, the report said.

Price rises are likely to be even smaller in lower-tier cities, where destocking was marginal in 2016 and did little to bring down developers' large inventories.

Mortgage lending is likely to slow next year, in keeping with the general cooling of the market. However, banks will retain a strong appetite for providing mortgages, which they view as relatively safe assets in terms of collateral protection, the report said.

Fitch believes credit risks in banking will increase if the rapid growth in residential mortgages continues.

"We still expect outstanding mortgage balances to grow faster than incomes in 2017, even if the estimated 33 percent growth seen in 2016 is unlikely to be sustained," the report said.

Since October dozens of Chinese cities have announced measures, including purchase limits and tightened mortgage restrictions, to prevent prices from rising out of control.

The latest round of property restrictions came after two years of progressive policy easing, starting with the relaxation of purchase restrictions in 2014. The momentum was further fueled by the government's pro-growth policies, including interest rate cuts and lower deposit requirements.

The sector's recovery has been uneven from city to city, with economically strong areas reporting drastic price rises, and less developed areas still reporting huge inventories of unsold houses.