China moved to allow its largest cities to cut down payments for homebuyers and encouraged lenders to lower rates on existing mortgages in its latest attempt to halt a slide in the country’s residential property market.
The nationwide minimum down payment will be uniformly set at 20% for first-time buyers and 30% for second-time purchasers, according to a joint statement from the People’s Bank of China and National Administration of Financial Regulation on Thursday. Mortgage-rate cuts will be negotiated between banks and customers. Both policies go into effect Sept. 25.
The moves sparked conflicting interpretations on their effectiveness, as economists gauge President Xi Jinping’s willingness to strengthen stimulus measures to combat a downturn that’s put Beijing’s 5% growth target at risk. China’s real estate slump has also increased dangers to the nation’s financial system, as well as global financial markets.
Beijing is betting that lower mortgage rates and down payments will revive demand for homes. Sales by the country’s largest developers fell 34% in August from a year earlier, a report showed Thursday, and Country Garden Holdings Co. — the former No. 1 — is on the brink of default.
The moves will likely boost property sales, alleviate liquidity pressure for buyers and improve market sentiment, Citigroup Inc. economists led by Xiangrong Yu wrote in a research note. “The favourable policy shift and the nearly confirmed cyclical bottom of the economy could be supportive for China assets.”
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Market Reaction
By contrast, Neo Wang, Evercore ISI’s New York-based managing director for China Research, said, “We were not impressed.” Many existing mortgages have no room for further interest-rate reductions because “they already enjoyed the floor rate” that’s now being set by regulators, he said.
China’s yuan rose 0.4% against the US dollar in offshore trading, and was at 7.2744 late in New York Thursday. KE Holdings Inc., which operates a Chinese housing-transactions platform, soared as much as 27% in New York. Developer Xinyuan Real Estate Company Ltd. rose as much as 8.6%.
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What Bloomberg Economics Says...“Bloomberg Economics estimates that the measures can release household purchasing power of around 0.24% of GDP — equivalent to a 15-basis-point cut in the policy rate.”— Chang Shu, chief Asia economist
Local governments will set their own down-payment thresholds and interest-rate floors according to regional market conditions, the national regulators said Thursday. The floor for lowered mortgage rates should be set at the local rate for first-time home purchases by preferred customers at the time the home was bought, the regulators said.
Down payments can be as high as 80% for a second-time buyer in the capital. More than a dozen larger cities in China currently set the minimum on new homes at 30% or higher, according to Huatai Securities. Since 2016, some cities were able to set their ratios lower than 30% for first homes, but they tended to be smaller ones. The new stance effectively ends the distinction, the regulators said.
Steps taken up to now have failed to revive demand as homebuyers remain deterred by falling prices amid concerns that builders will struggle to finish apartments.
“The entire package is a step in the right direction — these are stabilising measures, and will help confidence from sliding further,” said Kelvin Lam, a China economist at Pantheon Macroeconomics.
Mortgage rates were falling even before this latest move. As of June, 100 out of 343 Chinese cities had lowered the floor new home loans — or removed the minimum required — the PBOC said in its latest quarterly monetary policy report. That brought the nation’s average to 4.11% in June, down 0.51 percentage point from a year earlier. By contrast, rates in the US have surged to more than 7%.
Reduced lending rates put pressure on banks’ interest margins, and have prompted lenders to also reduce their funding costs. At least four banks, including Industrial & Commercial Bank of China Ltd. and Agricultural Bank of China Ltd. cut their deposit rates after regulators’ late-Thursday announcement.
Next steps to look for will be any moves by the central government to ease fiscal policy and resolve local debt challenges, according to Morgan Stanley economists led by Robin Xing. The team said such moves may emerge in the next few months.
“We believe these measures combined would help stabilize aggregate demand,” Xing and colleagues wrote.
