Chinese authorities moved to alleviate a major property sector downturn by, among other things, allowing existing property owners to seek a reduction in their mortgage rates and reducing down payment requirements for new customers.
This comes as six of the biggest state-owned banks cut deposit rates by as much as 25 basis points on Sept. 1 to entice customers to borrow and spend more, the state-backed Securities Times reported. Banks could also face a financial hit should mortgage rates drop.
Under the new measures, borrowers can renegotiate interest rates on mortgages for their first homes from Sept. 25, according to an Aug. 31 joint announcement of the People's Bank of China (PBOC) and the National Administration of Financial Regulatory (NAFR), the country's new umbrella regulator for financial services. The down payment requirements for first-time homebuyers were cut to 20% from 30%, except in Beijing and Shanghai. The requirement for buyers of second homes was cut to 30% from 40% across most of the country.
Separately, the southern cities of Shenzhen and Guangzhou will allow homebuyers who do not own a residential property locally to get the same benefits as first-time buyers.
"For the broader property sector, we believe the regulators' move indicates that the policy stance has been shifted to stimulate the property sector already, with the aim to stabilize economic conditions," Nomura said in an Aug. 31 note for clients.
Cutting existing mortgage loan rates may alleviate the prepayment issue and transfer cash from banks to households, while lowering new mortgage rates would help new home sales, Nomura said.
Falling sales
The new measures come as the property sector in the world's second-largest economy experiences a multiyear downturn.
Home sales by the top 100 developers fell 34% year over year to 343.01 billion yuan in August, following a similar decline in the previous month, according to real estate consultancy firm CRIC data released Sept. 1. In addition to several major sector players reporting stress, the official Real Estate Climate Index, compiled by the National Bureau of Statistics, hit a low of 93.78 in July from a high of 102.03 in September 2018.
While China's gross domestic product grew 5.5% in the first half of the year, outpacing the nation's aim of around 5% GDP growth in 2023, a recent slowdown in exports amid the property sector gloom points to economic weakness ahead.
The latest nationwide measures to shore up the property sector come after "some modest piecemeal easing measures" announced after the meeting of the Politburo, China's top decision-making body in July, UBS Investment Bank Research said Sept. 1.
"We view this policy easing as more positive and different compared to the previous ones, as a nationwide policy like this helps strengthen homebuyers' confidence on property price outlook," John Lam, head of China and Hong Kong property at UBS Investment Bank Research, said in emailed comments.
Banks burdened
The property easing measures could mean an additional burden for China's banks in a slowing economy, analysts said.
The latest policies "underscore a delicate balance between stimulating demand, ensuring financial sector stability and boosting household consumption," said Redmond Wong, Hong Kong-based Greater China Market Strategist at Saxo Markets.
Banks would lose 77 billion yuan in annual interest income under a scenario where 50% of the 38.6 trillion yuan of the sector's outstanding mortgages see a 40-basis-point reduction in interest rates after renegotiation, Wong said.
If the cuts in existing mortgage loan rates are around 10 to 25 basis points, the gap between the existing and new mortgage rates might still be big enough to encourage repayment, Nomura said in its note. The Japanese brokerage cited the example of China Construction Bank Corp., which charges around 5% on its existing mortgage loans, while the June market rate on new mortgages was 4.11%.
Mortgage loans typically make up more than 20% of the loan books in Chinese banks. Industrial and Commercial Bank of China Ltd., the largest lender in the country and the world, reported an outstanding residential mortgage of 6.37 trillion yuan, or 25.2% of it loan portfolio, as of end of June 2023, according to its interim results for the first half of 2023.
As of Aug. 31, US$1 was equivalent to 7.26 Chinese yuan.
