On 21st November, the People’s Bank of China (PBOC) announced a cut in benchmark lending rates of 40bps (one-year rates from 6% to 5.6%) and the one year deposit rate by 25bps to 2.75% (effective from 22nd November). At the same time they further liberalised deposit rates by increasing the ceiling to 120% of the benchmark, from 110%. This is the first rate cut in China since July 2012. The asymmetric rate cut lowers banks’ margins (which are very high) and reduces the cost of capital for borrowers, but without an increase in lending quotas it does not appear that generating faster GDP growth was a clear motivation for the move.
So what will the impact of the rate cut be on the housing market and individual homebuyers? The chart below illustrates the impact of the rate cut, combined with the effect on monthly instalment payments of the 30th September increase in the discount for mortgage rates that first time home buyers can enjoy which, in practice, went from 0% to 10%(1).
It shows that before the rate cut, the 10% mortgage rate discounts offered by some banks after 30th September resulted in a 6.7% monthly savings in instalment payments for homebuyers taking 30-year mortgages, and 5.1% for those taking 20-year mortgages (comparing scenario 2 with scenario 1). After the rate cut, the combined effect of the lower base lending rate and mortgage rate discounts is even more dramatic, which leads to a 10.3% monthly savings in instalment payments for buyers taking 30-year mortgages (comparing scenario 3 with scenario 1). Scenario 4 is the theoretical maximum 30% mortgage rate discount to the new benchmark rate in which homebuyers can see monthly instalments decrease by 22.1%. Although scenario 4 is more in theory, the 10.3% monthly savings in scenario 3 is very much reality and is significant.
Chart 1: Monthly payment difference before and after the rate cut on November 21
Assumptions:
1) The total price of an apartment is RMB 5 million;
2) The buyer borrows 70% of the total value of the apartment from banks as commercial mortgage loan.
Source: JLL Analysis
We’ve seen much news reporting the sluggish sales in the residential market in 2014. However, when comparing China’s commodity housing sales volumes in the past six years (Chart 2), 2014 is far from the worst. In fact, sales volume in 2014 is running ahead of all prior years other than 2013, based on January-October data. With Home Purchased Restrictions loosened in most cities since August and easing in mortgage policies since late September, we see the rate cut leading to further improvement in market sentiment for the remainder of the year. We expect sales volume for the full year of 2014 to be on par with last year.
Chart 2: Commodity housing sales volume in China (accumulative)
Source: CEIC
Note: (1) PBOC announced on 30 September 2014 that mortgage rates can be as low as 30% below the benchmark rate. However, in practice, first-time buyers can now receive a 5-10% mortgage rate discount depending on the bank.
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