Guangzhou, capital of Guangdong province, became the first tier-one city in China to ease its policy on residential property purchases and categorize households with mortgage records but no local home ownership as first-time homebuyers. They will enjoy favorable down payments and mortgage requirements. The move came after the central authorities announced they will let city-level governments decide on the matter. Experts said more big cities may follow suit as China has relaxed property policies to revive the sluggish real estate industry that has been dragging the overall economy down. Expectations have also been building for banks to lower existing mortgage rates.
Experts said further optimization of China’s real estate policy will stimulate domestic demand while reducing risks, adding new impetus to the recovery of the Chinese economy. One of the four first-tier cities in China — Beijing, Shanghai and Guangdong’s Shenzhen are the other three — Guangzhou said in a notice that financial institutions should treat homebuyers with no local home ownership as first-time buyers, regardless of whether they have taken a loan to buy a home in the past. First-time homebuyers usually enjoy lower mortgage rates and smaller down payments than others.
The optimization of the mortgage policy aims to propel the stable and healthy development of the property market, the city government said. “It’s possible that peer cities may follow suit, though the degree of policy relaxation could vary,” said Zhang Shuncheng, Associate Director of China Corporate Research at Fitch Ratings. The new policy, if implemented, should help release pent-up demand from homebuyers who have sold their existing homes and those who only purchased a non-local home via a mortgage, probably leading to a temporary sales rebound in those cities, he said, adding that a sustained recovery is unlikely without a fundamental turnaround in homebuyers’ sentiment. Since the start of the year, some second-tier cities, including Hangzhou in Zhejiang province and Tianjin, have eased real estate mortgage policies.
Central authorities signaled in recent weeks that banks should lower mortgage rates on existing loans. Many banks have expressed readiness. Lin Li, Vice President of Agricultural Bank of China (ABC), said at a conference announcing the lender’s interim results that the bank will formulate specific rules and improve provisions of relevant contracts as soon as possible as long as policy measures in this regard are officially released. Xie Zhibin, Vice President of China CITIC Bank, said the bank is preparing adjustments in response to possible mortgage rate cuts. Vivian Xue, Director of the APAC Financial Institution at Fitch Ratings, estimates that outstanding mortgage loans that originated between 2018 and 2022 now carry a relatively high interest rate of around 5%, which suggests banks could cut the rates on outstanding mortgage loans by as much as 80 basis points in order to align with the current five-year loan prime rate of 4.20% and weighted-average rate for incremental mortgages of 4.14%.
In China, apartments are often sold before construction has even begun. China Business News, a state-backed newspaper in Shanghai, reported that only a third of unfinished pre-sold homes identified in September 2022 had been completed as of May this year. Breaking it down geographically, the proportion of deliveries was 56% in southern China, 40% in the east, 15% in the southwest, and 16% in central China. With no light seen at the end of the tunnel two years after Evergrande’s debt crisis unfolded, analysts warn that Beijing needs to take immediate actions – or perhaps a different approach entirely – to prevent contagion and spillover fears. “Ensuring the delivery of unfinished property units is one of Beijing’s measures to protect consumers, i.e. homebuyers, to prevent this from turning into a mass social problem,” said Raymond Yeung, Chief Greater China Economist with ANZ Bank.
Beijing has taken some steps to maintain social stability and prevent a banking crisis. In June, the central bank extended CNY200 billion worth of relending quotas to ensure completion of unfinished property units and to allow commercial banks to roll over maturing loans after the Evergrande crisis, extending the policies until the end of next year. The current downturn in China’s real estate sector is caused by government policies, not by the real estate sector itself, said Yao Yang, Economist and Dean of Peking University’s National School of Development. He called on authorities to abandon restrictive measures on real estate credit. Secondly, bankruptcy proceedings and reorganizations should be carried out for developers with capital-outflow problems. “Now the debts are hanging in the air. Some big companies are too big to fail, but it’s leading to their suppliers being dragged to death,” Yao was quoted as saying. Thirdly, the authorities must resolutely stop intervening in the market’s trades and falling home prices, Yao added.
Fitch Rating says the outlook for Chinese developers is “deteriorating”, citing a lack of improvement in private developers’ funding access and weak homebuyer sentiment. However, it says the outlook for many state-owned developers is stable. Behind the private real estate developers there are dozens or even hundreds of smaller private firms that have also been dragged into the debt crisis, the China Daily reports.
