Will China’s property market recover on central bank’s unprecedented emergency measures?


China’s top financial regulators are resorting to unprecedented measures to stem ongoing weakness in the country’s property market, with some analysts expecting first-home-loan rates to soon drop beneath the 3% threshold. 

Key measures include reductions to both interest rates and deposit ratios, as well as the direct channelling of credit by the Chinese central bank to select state-owned enterprises for the purpose of making home purchases. 

Mortgage rates floors rescinded

The People’s Bank of China (PBOC) – the Chinese central bank, and the National Financial Regulatory Administration (NFRA) recently issued a joint notice to announce the cancellation of the nationwide floor on the interest rates for first and second home loans starting from 18 May. 

PBOC also reduced the minimum down payment for mortgages to the record lows of 15% for first-home loans, and 25% for second-home loans, as well as cut the lending rates for China’s housing provident funds by 0.25 percentage points. 

State-owned media reports that the move had an immediate impact on the share prices of listed real estate companies, giving a shot in the arm to Beijing Urban Construction (600266), Hangzhou Binjiang (002244) and Hefei Urban Construction (002208). 

Domestic observers say the measures launched by PBOC and NFRA are historically unprecedented.

“The intensity of these adjustments has never been seen before, and marks the biggest loosening in the history of the domestic real estate market,” said Yan Yuejin (监严跃) from the Yiju Research Institute. 

“We can see the extreme determination at the regulatory level to stabilise the property market,” said Zhang Dawei (张大伟), chief analyst at Zhongyuan Property. 

“Looking at these measures, the determination at the regulatory level has already greatly exceeded market expectations.”

Analysts say the moves could lead to a steady recovery in China’s housing market within the next several years. 

“Based on prior experience, the loosening of central policy has a greater effect on market confidence than local government policies,” said Wang Xiaoqiang (王小嫱), chief analyst at the Zhuge Data Research Centre.

“The new policies can spur more market entrants, invigourate market activity, and expedite rapid improvement to the housing market within a brief period.”

“Market supply and demand will gradually improve over the next one to two years, ” said Zhang Hongwei (张宏伟), the founder of Jingjian Consulting. 

“The property market will then embark upon a comparatively healthy path of development.”

Home loan rates expected to drop beneath 3% 

Wang Xiaoqiang said PBOC and NFRA’s decision to remove the floor on mortgage rates could lead them to fall to historic lows of less than 3% in some Chinese cities. 

“The central government is no longer setting unified restrictions for commercial loans, and each locality can make independent adjustments based on their own conditions,” Wang said. 

Zhang Dawei points out that aside from a small number of first and second-tier cities, the minimum home loan rate in most of China currently stands at 3.25%, while in some municipalities it’s as little as 3.1%. 

Data from the Chinese central bank indicates that local authorities have already taken concerted action on the lending front to remedy the ailing condition of property markets under their watch. 

As of the end of March, 75 out of 343 municipalities in China had reduced the floors for first-home-loan rates, while 64 had cancelled them completely. 

Data from the China Index Academy indicates that 20 cities announced phase-based reductions to first-home-loan-rate minimums in April, while in May the province-level capitals of Nanjing and Hefei eliminated them outright.

PBOC has also reduced the lending rates for China’s housing provident funds – long-term home savings plans funded by mandatory monthly deposits from both employers and employees.  

The 25 percentage point cut brings the housing provident fund first-home loan rates for five years and below to 2.35%, and to 2.85% for more than five years. 

Rates for second home loans have fallen to 2.775% for five years and below, and 3.325% for more than five years. 

Down payment ratios fall to record lows 

The cuts to mortgage down payments bring them to their lowest levels on record in China, at 15% for first-home loans and 25% for second-home loans at the national level. 

These levels are still not immodest by international standards, however, with down payments commonly running from 3% to 20% in other countries. 

While down payment minimums as mandated by national authorities have fallen to record lows, they remain higher at the regional level where local authorities still hold sway over market regulations. 

The Chinese central government currently gives discretion to local governments to determine their own property market policies to suit market conditions within their respective jurisdictions.

It appears that Beijing will now play a great role, however, in setting down payment levels following consultation with local authorities. 

According to official statements, the regional offices of PBOC and NFRA will “independently set the floors for mortgage down payments based on the adjustment requirements of municipal governments, and in accordance with the principle of city-by-city policy implementation.”

At present, the down payments in most cities around China have fallen to 20% for first-home loans and 30% for second-home loans. 

However, these figures are considerably higher in some first-tier cities that have long been host to overheating housing markets, at 30% for first-home loans and 40 – 50% for second-home loans. 

Analysts say municipal authorities will swiftly follow the lead of the Chinese central bank in reducing home down payments. 

“After the reduction in down payment ratios, we expect even more cities to engage in follow-up implementation,” said Chen Wenjing (陈文静), head of market research at the China Index Academy. 

“There is room for reductions in first-tier cities, with expectations of further reductions in the threshold for homebuyers to make purchases.”

Zhang Dawei said he expects Beijing and other first-tier cities to implement large-scale reductions to both down payment ratios and home loan rates. 

300 billion yuan in central bank re-loans for social housing

In addition to adjustments to the rates on mortgages made by commercial banks, PBOC is also turning to structured monetary policy tools to boost the health of the Chinese housing market. 

PBOC vice-governor Tao Lingjie (陶玲介) said that the Chinese central bank plans to make use of social housing re-loans to boost the supply of affordable dwellings. 

The loans will see PBOC provide 300 billion yuan in low-cost funds to 21 nationwide commercial banks, for them to lend to state-owned enterprises that are selected by local governments. 

These state-owned enterprises will then use these loans for the purchase of unsold homes already built by developers, in order to convert them into social housing. 

According to official sources, the process will entail “the government leading market-based operation.”

The 300 billion yuan in social housing re-loans will have an interest rate of 1.75% and a term of one year, as well as four permitted extensions.

Banks eligible for the re-loans include China’s policy banks, state-owned commercial banks, as well as joint-stock commercial banks.

PBOC expects the reloans to drive as much as 500 billion yuan in lending by commercial banks.

According to Diyi Caijing, the state-owned enterprises chosen by local governments are not permitted to be local government investment vehicles or “have any involvement with the hidden debts of local governments”. This is due to widespread concerns over risk in relation to China’s highly leveraged regional authorities. 

Local governments remove property purchase restrictions

The local governments of some of China’s leading cities have also actively sought to boost their own property markets by rescinding long-standing restrictions on property purchases. 

On 9 May, Hangzhou – the capital of Zhejiang province, and Xi’an – the capital of Shaanxi province, announced the complete cancellation of all restrictions on property purchases, including the assessment of buyer qualifications. 

Other cities that have already introduced similar measures include the provincial capitals of Wuhan, Hefei, Nanjing, Changsha and Chengdu. 

Cancellations of property restrictions by other cities could be forthcoming, which could create tremendous impetus for urban property markets around China. 

Major cities and regions that currently impose restrictions on homebuyer qualifications include Beijing, Shanghai, Shenzhen, Guangzhou, Tianjin and Hainan.