China’s Mortgage Rates Rise and Market Trends

The recent Chinese real estate market has been truly surreal, often leaving even experts puzzled as to what’s real and what’s not. On the developer side, companies like Vanke are scrambling to rescue themselves. Meanwhile, on the banking side, two cities, Huizhou in Guangdong and Shijiazhuang in Hebei, one in the south and one in the north, have raised their mortgage interest rates. Most banks in Huizhou have announced that starting in March, the interest rate for first-time homebuyers will increase by 15 basis points, from 3.45% to 3.6%. Banks in Shijiazhuang were even stricter, raising rates by 30 basis points, from 3.45% to 3.75%.

Here’s a brief explanation: isn’t the LPR (loan prime rate) for loans over five years set at 3.95%? How come Huizhou and Shijiazhuang have rates below that? Many people have asked this question, and the reason is simple: local rates can be adjusted slightly above or below the benchmark rate. This explains why some people’s mortgage rates can exceed six percent. Both Huizhou and Shijiazhuang coincidentally decided to raise their mortgage interest rates.

This is quite interesting. Let’s look at Shijiazhuang. In cities like Shanghai, Xi’an, and Shijiazhuang, new home prices have consistently risen both month-over-month and year-over-year from December 2023 to February 2024. Does this improvement in the real estate market allow them to unilaterally decide to increase mortgage rates? Actually, there’s a basis for it. In January 2023, the Banking and Insurance Regulatory Commission clarified that cities where new commercial housing prices have risen for three consecutive months, both month-over-month and year-over-year, may reinstate the lower limit for first-time homebuyer mortgage rates in the next quarter.

Policy Changes and Market Impact

A reporter from China Real Estate News interviewed a staff member at a China Construction Bank branch in Shijiazhuang, who said that the recent adjustments were based on previous policies. If Shijiazhuang’s mortgage rate increase aligns with these regulations, Huizhou’s situation is quite different. Although Huizhou’s real estate market has shown some recovery, it doesn’t meet the stated conditions. Over the past year, Huizhou’s property market has struggled at the bottom, far from showing three months of growth. After the Chinese New Year holiday ended, new home sales improved, with four consecutive gains in transaction data, but this at most represents one month of positive performance.

The Reasons for Shijiazhuang and Huizhou Mortgage Rates Increase

Protecting the Interests of Banks

So, what’s really going on with Shijiazhuang and Huizhou increasing mortgage rates against market trends? Two likely reasons make sense. First, protecting the interests of banks. According to an analysis by China Real Estate News, the real reason behind this move is that banks are earning less. With mortgage rates decreasing, people have been paying back less each month, and the whole nation seems to be starting a deleveraging journey. This would have been a good thing.

Banks have made it clear that their interest rate margin has reached historic lows and cannot decrease further. Initially, people argued that mortgage rates were too high and asked for a reduction. Banks responded by lowering rates for both new and existing homes. Then, people argued that down payments were too high and needed to be reduced, which banks addressed as well. Lastly, people advocated for relaxing purchase restrictions, which have now been lifted in all but first-tier cities. In Hangzhou, a leading second-tier city, second-hand homes are no longer subject to purchase restrictions.

Despite making significant concessions, banks still struggle with profitability. A bank representative candidly told a China Real Estate News reporter that while mortgage rates have been cut substantially, deposit interest rates have seen even steeper reductions, leaving banks with diminished returns. Ultimately, this is a matter of mindset. As the saying goes, it’s easy to move from frugality to luxury, but much harder to transition back.

Testing the Market Reaction

The second reason for this manoeuvre is that it’s likely a test. Huizhou’s contrarian increase supports this notion. Despite not meeting the policy criteria, Huizhou still chose to increase rates, which seems like a way to gauge the market’s reaction. Last year, house prices fell, and mortgage rates were lowered, yet people still didn’t buy. Now that the early spring real estate market is performing better, they’re increasing mortgage rates to see if people will buy or not. Whether the spring market’s improvement is due to a rebound or other reasons is less important. What matters is testing the crowd psychology that encourages buying when prices are rising and holding back when they’re falling.

Will Mortgage Rates Increase Solve China’s Real Estate Issues?

The Second-hand Home Market is Taking Over

In the current situation, will raising mortgage rates be effective? Some real estate media outlets have been loudly proclaiming that house prices are set to rise and urging people not to miss out. However, two points are worth considering. First, don’t be deceived by outward appearances; it’s important to look beneath the surface. Take Shijiazhuang as an example: while new home prices have generally risen, the trend in new home prices is opposite to transaction volumes.

From January to February 2024, Shijiazhuang’s new home prices cumulatively increased by 0.9%. However, during the same period, Shijiazhuang’s total commercial housing transaction area was only 332,000 square meters, down 25.1% year-over-year. The number of transactions also fell by 22.0% to just 2,856 units. The rise in Shijiazhuang’s housing prices is primarily driven by the supply side, as higher-end property transactions pulled the average up.

Regarding a potential recovery in the real estate market, it’s essential to consider both new and second-hand home markets, as second-hand transactions play a significant role. Based on the urbanization progress in developed nations, the future of real estate transactions will certainly be dominated by second-hand homes.

Take Japan’s Greater Tokyo area as an example: after the property bubble burst in the 1990s, the economy was sluggish for over a decade, and new home transactions continued to decline. By 2008, new and second-hand home sales were about equal. In the last six years, from 2016 to 2022, second-hand home transactions consistently accounted for more than 60% of the market.

China is experiencing a similar situation. According to data compiled by the Tospur Institute for 2023, the new home transaction volume in 20 cities accounted for over half the total. However, by 2023’s second half, the transaction volume for second-hand homes surpassed new homes for the first time, reaching 15.86 million square meters, while new home transactions totaled only 14.95 million square meters. As China moves forward, second-hand homes are starting to play a leading role. Therefore, data suggesting favorable trends for new homes should be taken with a grain of salt.

China’s Real Estate Policies are Changing

Second, aside from external stimulus policies, we must also consider fundamental factors. Real estate policies change frequently, with small changes daily and major shifts every few days. The Ministry of Housing and Urban-Rural Development emphasized that bankruptcies should happen where necessary, yet the State Council recently reiterated the need to promote stable and healthy development in the real estate market.

Falling birth rates directly impact the primary home-buying demographic. Data from Tospur Institute shows that the key home-buying age group is 26 to 40. Those aged 26 were born in 1998, a year with 15.85 million births. Those aged 40 were born in 1984, when 20.88 million were born. By 2024, the core home-buying population is projected to shrink by 5.03 million people.

Future Market Outlook

Based on these calculations, from 2024 to 2030, the number of prospective homebuyers will continue to decline each year, with the key homebuying demographic shrinking by nearly 50 million over the next seven years. This forecast is quite clear. Although a shrinking population will inevitably impact the housing market, areas with positive net migration will still have stronger real estate markets than areas that can’t retain their population.

Whether raising mortgage rates or increasing prices to clear inventory, these actions are testing the psychological limits of homebuyers. Previously, homes were sold without clear plans for where the funds would go, and many projects weren’t completed. Even if funds are secured and the houses built in the coming years, the worry remains that the prospective buyers may have vanished. Let’s not be too eager to see the last remaining savings in the people’s wallets.