Li Wen, a human resources director at a state-owned enterprise in Nanchang, Jiangxi province, paid off an outstanding amount of 200,000 yuan ($28,170) on her mortgage in January, shortly after receiving her annual bonus at work.
The 36-year-old had prepaid her loans, totaling 600,000 yuan, in recent years, even after the interest rate was reduced from the original 5.39 percent to 4.3 percent after a few rate cuts since last year. year.
“Putting the money in the bank doesn’t do anything for me,” Li said. “Deposit rates are much lower and we don’t have ideal high-yield investment options.”
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“I would prefer to pay off my loans early to save on interest costs, especially as salary and job losses become more common.”
Li’s concerns are shared by many homeowners in China, who had bought homes in a red-hot market in high hopes of appreciation before prices started to fall.
A construction site in Beijing. Photo: Agence France-Presse alt=A construction site in Beijing. Photo: Agence France-Presse>
China’s real estate market, once a key pillar of the national economy, has been in a slump since August 2020, when the government introduced a policy dubbed “the three red lines” aimed at curbing developers’ borrowing spree.
Since then, some homeowners, burdened by heavy credit burdens and an uncertain economic outlook, have sold their homes. Others, like Li, saved and took advantage of interest rate cuts to pay off mortgages or home loans.
This year, the People’s Bank of China cut the five-year interest rate, which commercial banks use as a benchmark to adjust their mortgage rates, twice by a total of 35 basis points to 3.85 percent. The central bank has also lifted the lower limit on mortgages on new and second-hand homes across the country.
That prompted dozens of Chinese cities to cut their mortgage rates to 3.2 percent, and some others to below 3 percent. According to government data, the average interest rate for newly issued mortgages was 3.45 percent in June, compared to 4.27 percent in September last year.
Homeowners seized their opportunity.
Last year, an average of 450 billion yuan worth of mortgages were paid off prematurely every month, according to data from the Australia and New Zealand Banking Group (ANZ). That number rose to 600 billion yuan in the first seven months of this year, equivalent to 15 percent of China’s retail sales or 12 percent of the population’s disposable income during that period.
Residential buildings in Beijing. Photo: Bloomberg alt=Residential buildings in Beijing. Photo: Bloomberg>
Outstanding mortgages in China fell to 37.79 trillion yuan at the end of June, the lowest level in almost three years, official data showed.
Amid calls to narrow the interest rate gap between existing and new mortgages, China could cut rates on outstanding mortgages by up to 50 basis points as early as this month, growing to a total cut of 80 basis points next year, a report shows. recent study. report from Bloomberg, citing unnamed sources.
The expected relief measures took away the hopes of some homeowners. “Once that is implemented, I will relax my budget and withdraw my request for early mortgage payments,” wrote one user on Xiaohongshu, an Instagram-like Chinese social media platform also known as Red.
“A further reduction in outstanding mortgage interest rates will reduce costs for existing homeowners and stimulate consumption and investment,” said Chen Wenjing, director of market research at the China Index Academy. “It will also ease the wait-and-see sentiment carried by expectations of further rate cuts and support consumption, including home purchases.”
But while such measures may lead to a recovery in consumption in the short term, some analysts say they will do little to stimulate the real estate market in the long term.
“If this mortgage rate cut were to materialize, we believe the potential impact would be quite limited in stimulating demand in China’s real estate market,” said Ricky Tsang, managing director at S&P Global Ratings.
“The loan costs of existing homeowners can be reduced with an interest rate reduction, [but] Real estate demand continues to be constrained by the weakening economy and the decline in housing prices,” he said.
A construction project under construction in Beijing. Photo: EPA-EFE alt=A construction project under construction in Beijing. Photo: EPA-EFE>
While an 80 basis point cut is “generally in line” with expectations, said Xing Zhaopeng, a senior China strategist at ANZ, “the impact may be limited.”
“It may help reduce mortgage prepayments, but it is not enough to get the real estate market back to normal,” he said, citing low rental yields across the country – around 3 percent in major second- and third-tier cities. about 2 percent in prime cities – as one of the biggest hurdles to purchasing a home.
Buyers also remain cautious about falling house prices.
Prices of new homes in China fell the most in nine years last month, down 5.7 percent from a year ago, according to official data released Saturday. Meanwhile, contracted revenue generated by the top 100 Chinese developers fell 10 percent in August from a month earlier, and 27 percent from a year earlier, according to China Real Estate Information Corporation.
“Absent a major stimulus to reverse house price expectations and lift rental yields to levels above mortgage rates, Chinese properties could remain uninvestable,” ANZ’s Xing said.
This article originally appeared in the South China Morning Mail (SCMP)the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please visit the SCMP App or visit the SCMPs Facebook And Tweet pages. Copyright © 2024 South China Morning Post Publishers Ltd. All rights reserved.
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