China’s financial authorities have decided to cut the down payment ratios and mortgage interest rates for homebuyers to stimulate property prices ahead of the traditional high season in late September and October.
Minimum down payment ratio for the first-time homebuyers will be lowered from 30% to 20% while that for the second-time buyers will be cut from 40% to 30%, according to a joint statement released by the People’s Bank of China (PBoC) and the National Administration of Financial Regulation (NAFR).
Minimum mortgage rate for the second-time homebuyers is set at the level of 20 basis points over the loan prime rate (LPR), matching with that for the first-time buyers. A basis point is a hundredth of a percentage point.
Analysts said the new measures, which took effect on Friday, will help encourage new homebuyers to enter the markets in the first-and-second-tier cities, but not the lower-tier ones. They also said the measures will hurt Chinese banks’ profit margins.
A-shares of the Bank of China decreased 1.07% while those of the Industrial and Commercial Bank of China dropped 1.08% on Friday. Agricultural Bank of China fell 0.58%. Stock markets in Hong Kong closed as a super typhoon called Saola was approaching the city.
The Shanghai Composite Index rose 0.43% to close at 3,133 on Friday. It came after the Caixin/S&P Global manufacturing purchasing managers’ index (PMI) increased to 51.0 in August from 49.2 in July, beating analysts’ forecasts of 49.3 and marking the highest reading since February. A reading below 50 indicates contraction, while above 50 means expansion.
Meanwhile, the PBoC announced its plan to cut the foreign exchange reserve requirement ratios (RRRs) by 200 basis points from 6% to 4%, releasing liquidity of about US$16.4 billion into the banking system.
The RRR cut, aimed at supporting the Chinese yuan, will take effect on September 15.
Renminbi has depreciated by 5.3% this year, reaching about 7.29 yuan to one United States dollar as of late August. The currency rebounded by 0.4% to 7.26 on Friday.
Early repayment
Besides their Thursday night statement on changes in down payments and rates, the PBoC and NAFR said in another statement that first-time homebuyers who had already borrowed mortgage loans before August 31 can renegotiate their rates with banks starting September 25.
“Many of the existing homeowners, who are having their mortgage rates at 5-6%, will be entitled to slash their rates by more than 100 basis points,” said Zhang Dawei, chief analyst at Centaline Property Agency Ltd. “People who borrowed one million yuan (US$137,798) for 30 years can lower their monthly mortgage payment by 839 yuan from 5,995 to 5,156 yuan.”
Tang Guanghua, head of research at Shenyin & Wanguo Futures Co Ltd, said the average interest rate on mortgage loans borrowed in the first half of this year is 4.18%, compared with 5.15% for those borrowed between 2019 and 2022. Tang said mortgage deals involving about 25 trillion yuan, or two-third of all the outstanding mortgage loans of 39 trillion yuan, will have to be renegotiated.
An unnamed spokesperson for the PBoC told the media that the mortgage rate cut will not only help homeowners save money; it will also discourage people from making early repayment, a problem that has troubled Chinese banks over the past two years.
Financial experts said since China’s property bubbles burst in mid-2021, Chinese banks have gradually lowered their mortgage rates. They said many homebuyers who were taking out mortgage loans at rates of around 5.8% two years ago wanted to repay their mortgage loans earlier as they were unhappy that they could not enjoy the lowered rates, which are close to 4%.
They also pointed out that two years ago, people could enjoy an interest rate of 6-10% by investing in wealth management products in China and use this income to pay their mortgage. They said that, with the yields of most wealth management products now falling below the mortgage rates, many homeowners prefer to have early repayment.
“Many Chinese banks are very worried about this wave of early repayment,” He Yi, a Beijing-based financial columnist, says in an article published earlier this year. “Mortgage loans are one of the highest quality assets for banks. A large wave of early repayment will make banks lose their high-quality assets.”
He said many homeowners seeking to make early repayment were asked by their banks to go to their branches. He said some people had waited for several months before their applications were handled.
“In the first half of 2021, people were still queuing up in front of banks to borrow mortgage loans but now they are queuing up for repayment,” He said.
The PBoC finally announced on Thursday that homeowners could renegotiate their mortgage deals with banks from September 25. It means homeowners will then enjoy lower mortgage rates and be less motivated to have early repayment.
Property and local debt crises
Since April, the situation of China’s home markets has deteriorated as property developers cut selling prices to boost sales and replenish their cash for debt repayment. But the overall property demand has decreased as many people suffer from unstable income.
In July, 44 of the 70 largest Chinese cities recorded year-on-year declines in new home prices, according to the National Bureau of Statistics (NBS). In June, new home prices fell in 42 out of the 70 cities.
Some economists pointed out that the country’s weakening property prices will make it more difficult for property developers to improve their financial situations. They said the property crisis will also drag down land sale markets and worsen local governments’ debt problems.
They said the only way to end both crises is to boost property prices and improve homebuyer confidence.
Tang said the latest reduction of minimum down payment ratios will help push up home prices in the first-and-second-tier cities and stabilize the property markets.
However, it remains unclear whether this measure can stimulate property prices in lower-tier cities.
In fact, Heze, a prefecture-level city in Shandong province (that is, a fourth-tier city), already early this year lowered the minimum down payment ratios for first-time homebuyers from 30% to 20%. But the move did not show any effect.
“A lot of property developers have cut selling prices by tens or hundreds of thousands of yuan but still failed to boost their sales. A reduction in down payment ratio will definitely have no impact,” a Hunan-based property writer says in an article. “All homebuyers know that they will eventually have to pay more interest if they buy a property with a down payment of 20%, instead of 30%.”
He says a lot of homebuyers will enter the markets only after property prices start growing again.
Read: Property, local debt hurt China corporate earnings
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