Guangzhou announced on Wednesday that it will ease mortgage curbs – news that created a flutter of excitement and lifted Hong Kong’s mainland property index by over 3% on Wednesday morning.
The southern manufacturing hub, which has a population of about 14 million, is the first major Chinese city to undertake such a move and other big cities seen as likely to follow suit.
However, the lack of immediate follow-up by other cities and state banks, meant the boost for many embattled stocks faded and the index ended up rising just 0.3% by the close of trading.
Guangzhou’s decision comes as some Chinese state-owned banks are expected to lower interest rates on existing mortgages, three sources familiar with the matter said on Tuesday, in the first such cut since the global financial crisis.
Officials in Beijing are keen to revive the real estate sector, which is in a state of crisis given widespread defaults and massive debt-loads accumulated by major builders such as China Evergrande and Country Garden.
Beijing hopes the reduction in mortgage payments will help boost consumer demand for property. The sector had been a major economic growth driver for years but is now dragging it down amid slowing home sales and a string of defaults by developers.
China’s mortgage loans totalled 38.6 trillion yuan ($5.29 trillion) at the end of June, representing 17% of banks’ total loan books.
In a notice, the Guangzhou city government said mortgage curbs would be eased, allowing homebuyers to enjoy preferential loans for first-home purchases regardless of their previous credit record.
The rest of China’s top four first-tier cities – Beijing, Shanghai and Shenzhen – could follow suit, together with a dozen second-tier cities which have not eased yet.
Many smaller cities have already taken steps to make it easier to buy homes.
Country Garden set to report first-half results
The property sector, which accounts for roughly a quarter of the economy, has lurched from one crisis to another since 2021, and contagion fears deepened this month after liquidity stress in leading developer Country Garden became public.
Just how cash-strapped Country Garden is will be the focus when China’s largest private property developer reports its first-half results on Wednesday.
Like its peers, the company has been hurt by a drop in margins as property sales and the value of the homes themselves plummeted as the economy slowed.
The reduction in existing mortgage rates is one of several support measures Beijing has announced over the past few weeks, as concerns mount about the health of the world’s second-largest economy.
But some analysts and homebuyers are not convinced about how effective the steps will be in reviving buyer demand, as consumer confidence been badly hit by broader economic woes that pushed the youth unemployment rate to a record high in June.
Property agents said there were few people shopping in the secondary market, and commercial mortgage rates are still much higher than the rates offered by the housing provident fund, a savings programme by governments for housing purchases.
Jackson Wang said he is going to move his mortgage with a top Chinese bank to the provident housing fund, which would lower his interest rate to 3.2% from the current 4.8%. He pays more than 5,000 yuan ($686) per month for a flat in the eastern city of Linyi.
“I have already bought a home at a high price and been paying a high mortgage, so I’m hoping for a rate cut,” Wang, 38, said.
“I’m too disappointed in China real estate. I will not be attracted by the sector again unless home prices are reduced, a lot.”
Raymond Cheng, Hong Kong-based head of China research at CGS-CIMB Securities, said the easing mortgage rules came too late and their impact on boosting home sales may not be significant given the very weak homebuyers’ sentiment.
“The impact could be much bigger on developers’ sales if regulators implemented the policy six to nine months ago.”
Mortgage rate cuts will hurt banks
The mortgage rate cuts will add to margin pressure on banks. Three of China’s largest banks said in interim financial reports their net interest margins (NIM) — a key gauge of profitability — shrank in the second quarter.
Vivian Xue, director of APAC Financial Institution at Fitch Ratings, said revenue pressure on the banking sector was expected to persist in the second half of this year and into 2024, due to narrowing margins and tepid retail loan demand.
China’s benchmark banking sector index fell 1.04% after the Guangzhou mortgage announcement while China’s CSI300 index gained 0.02%.
To soften the effect, the sources said that major state banks would also lower interest rates on some fixed-term deposits, and the quantum of cuts would range from 10 basis points to 25 basis points.
- Reuters with additional editing by Jim Pollard