China mortgage rate cut, lower down payment requirements could save homebuyers 10 per cent in monthly instalments, revive home sales

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A recent cut in mortgage rates, coupled with lower down payment requirements for first-time buyers, could revive Chinese home sales, analysts said.

The People’s Bank of China (PBOC) announced a 15 basis points cut in the five-year loan prime rate (LPR) to 4.45 per cent on May 20. The LPR is used by banks to price mortgage loans. And this rate cut came a week after the PBOC said the mortgage rate floor for first-time buyers would be lowered by 20 basis points below the five-year LPR.

The home loan rate could be as low as 4.25 per cent, from 5.2 per cent in April, for first-time buyers, according to CGS-CIMB Securities. And coupled with other easing measures such as lower down payment requirements, reduced from 30 to 40 per cent to 20 to 30 per cent of a flat’s price, this should stimulate buying desire, said Raymond Cheng, head of China and Hong Kong research at CGS-CIMB.

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“It will help buyers save at least 10 per cent in mortgage instalments per month,” he said, adding that Friday’s rate cut was a surprise move that suggests the central government’s stance on housing had changed totally to being very supportive.

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The rate cuts and lower down payment requirements came after Shanghai reported zero growth in home prices for the first time in April since November 2020. In March, they grew by 0.3 per cent. But these easing measures could spur home sales.

Home sales were expected to increase in 100 cities in May, rising by 9 per cent to 19.6 million square metres from April, according to Shanghai-based E-house China Research and Development Institute. This estimate was, however, 58 per cent lower than the same period a year ago, it added.

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It is the reduction in mortgage rates that cemented Cao Tingkai’s decision to buy his first flat amid expectations that home prices could fall this year.

Cao, 25, a white-collar clerk in Shanghai, had been on the lookout for a home priced below 5 million yuan (US$750,475) before the city went into lockdown on April 1 due to a flare-up in Covid-19 cases.

“The economic hardship caused by the lockdown may benefit first-time homebuyers,” he said. “Monetary easing and home price drops can be expected.”

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Cao said he had 2 million yuan for a down payment on hand, thanks to his parents, and planned to secure a mortgage loan of 3 million yuan. The cut in the LPR could save him nearly 4,000 yuan in interest payments each month.

“The economic turmoil caused by the two-month suspension of businesses across the city will have a ripple effect, which will spread to the housing market,” he said. “A 5 per cent fall in home prices could save me another 400,000 yuan.”

Cao is not alone. Jiang Zhongyu, 35, another would-be homebuyer in Shanghai, said homeowners would have to offer discounts to get deals done.

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“It has become a buyer’s market since home buying interest will become weaker due to the lockdown,” he said. “Those who are eager to cash out from their properties will have to lower prices to attract buyers.”

The government will continue to provide more supportive measures to restore home buying confidence, said Andy Lee, CEO for southern China at Centaline Property Agency (China). “But a full market recovery will very much depend on the Covid-19 pandemic being brought under control,” he added.

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