Li Wen, human resources director at a state-owned enterprise in Nanchang, Jiangxi province, paid off her outstanding mortgage of 200,000 yuan (US$28,170) early in January, shortly after receiving her annual bonus at work.
The 36-year-old had paid back loans totalling 600,000 yuan in advance over the past few years, even after several rate cuts since last year slashed interest rates to 4.3% from an initial 5.39%.
“Leaving your money in a bank won’t do you any good,” says Lee. “Deposit rates are much lower and there are no ideal high-yield investment options.”
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“I would like to pay off the loan early to save on interest costs, especially now that salary and employment cuts are becoming more common.”
Li’s concerns are shared by many Chinese homeowners who bought homes when the housing market was booming, with high hopes of price increases, before prices began 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 major pillar of the national economy, has been in the lurch since August 2020, when the government introduced a policy known as the “three red lines” aimed at curbing a surge in borrowing by property developers.
Since then, some homeowners struggling with high mortgage burdens and an uncertain economic outlook have sold their homes, while others, like Lee, have saved money and taken advantage of lower interest rates to pay off their mortgages and home loans.
The People’s Bank of China has cut the five-year prime rate, which commercial banks use to adjust mortgage interest rates, by a total of 35 basis points twice this year to 3.85%. The bank also eliminated the minimum mortgage rate nationwide for new and second-hand homes.
As a result, many Chinese cities have cut mortgage rates to 3.2%, and others to below 3%. The average interest rate on new mortgages was 3.45% in June, down from 4.27% in September last year, according to government data.
Homeowners seized the opportunity.
According to data compiled by Australia and New Zealand Banking Group, an average of 450 billion yuan worth of mortgage prepayments were made each month last year, and in the first seven months of this year that figure rose to 600 billion yuan, equivalent to 15% of China’s retail sales in that period, or 12% of the nation’s disposable income.
A residential building in Beijing. Photo: Bloomberg alt=A residential building in Beijing. Photo: Bloomberg>
China’s outstanding mortgage loans fell to 37.79 trillion yuan at the end of June, the lowest level in nearly three years, official data showed.
China could cut interest rates on outstanding mortgages by as much as 50 basis points as soon as this month, for a total of 80 basis points by next year, amid calls to narrow the gap between interest rates on existing and new mortgages, Bloomberg reported, citing unnamed sources.
The prospect of relief has raised the hopes of some homeowners. “If it is implemented, we will loosen our budget and withdraw our application for early mortgage repayment,” wrote one user on “Xiaohongshu,” also known as “Red,” a Chinese Instagram-like social media platform.
“Further cuts in outstanding mortgage interest rates will lower costs for existing homeowners and spur consumption and investment,” said Chen Wenjing, market research director at China Index Academy. “It will also ease the wait-and-see mood that has been dragged down by expectations of further interest rate cuts, boosting consumption, including home purchases.”
But some analysts say that while such measures may boost consumption in the short term, they may do little to boost the property market in the long term.
“Even if these mortgage rate cuts come to fruition, we see very limited potential impact on stimulating demand in China’s property market,” said Ricky Tsang, director at S&P Global Ratings.
“While interest rate cuts may ease the mortgage burden for existing homeowners, [but] “Property demand remains subdued by a weak economy and falling house prices,” he said.
A building project under construction in Beijing. Photo: EPA-EFE alt=A building project under construction in Beijing. Photo: EPA-EFE>
Xin Zhaopeng, senior China strategist at ANZ, said the 80 basis point cut was “broadly expected” but “the impact may be limited.”
“It may help reduce premature mortgage repayments, but it will not be enough to bring the property market back to normal,” he said, pointing out that low rental yields across the country – around 3 percent in major second- and third-tier cities and 2 percent in first-tier cities – are one of the major obstacles to home buying.
Buyers are also remaining cautious amid the sharp drop in home prices.
New home prices in China fell 5.7 percent last month from a year earlier, the biggest drop in nine years, official data released on Saturday showed. Meanwhile, contract sales by China’s top 100 property developers in August plunged 10 percent from the previous month and 27 percent from a year earlier, according to the China Real Estate Information Corp.
“Without major stimulus to reverse the house price outlook and lift rental yields above mortgage rates, Chinese property may not be an attractive investment target,” ANZ’s Xing said.
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