Lending rule easing to boost property sales

BEIJING - Amid falling house sales and a property downturn, China on Tuesday evening announced measures to loosen lending rules for mortgages and property developers.

Most economists said the broader-than-expected relaxation and the clear credit-easing signal from the Chinese government should be a positive for property market sentiment and house sales.

The risk of a dramatic housing market correction and economic hard landing have been lowered, but the measures are unlikely to reverse the current property downturn, they said.

Easing lending rules

In a joint announcement by the People's Bank of China (PBOC), the central bank, and the China Banking Regulatory Commission, mortgages on a second home will be treated as a first mortgage if the buyer has no other outstanding mortgages.

As a result, people who wish to buy a second home will enjoy the same 30-percent down-payment ratio required of first-time home buyers, instead of the original 60 to 70 percent down-payment ratio.

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They will also be allowed interest rates as low as 70 percent of the 6.55-percent benchmark mortgage rate, instead of paying a 10-percent premium on top of the benchmark rate as required previously.

The announcement also formally cut the lower limit for interest rates on first mortgages to 30 percent below the benchmark rate (6.55 percent). Previously, the limit was 5 or 10 percent below the benchmark.

In cities without home purchase restrictions in place, commercial banks have the discretion to determine down-payment ratios and mortgage rates when people with two or more homes buy a new home, as long as they have no other outstanding mortgages.

Currently, only five out of 46 Chinese cities still impose home purchase restrictions, namely Sanya on Hainan Island and the country's four first-tier cities of Beijing, Shanghai, Guangzhou and Shenzhen.

The announcement also relaxes credit restrictions on developers, with banks now encouraged to support "quality" property developers. Developers will be allowed to issue corporate bonds and medium-term notes, and plans were announced for the official launch of real estate investment trusts (REITs) pilots.

Commercial banks are also encouraged to issue mortgage-backed securities and long-term special financial bonds to increase credit support for the property sector.

Clear easing signal

The announcement marks "the clearest and most important property policy relaxation to date," Wang Tao, chief China economist with financial services firm UBS, said in a research note.

Compared with earlier loosening of home purchase restrictions carried out separately by 41 cities nationwide, the formal relaxation of credit constraints will provide more effective support for property demand, she said.

This is because the latter will improve affordability significantly, helping to increase effective demand from both upgrades and first-time home buyers.

"The lower mortgage rate for first home loans alone could improve affordability by as much as 10 percent," she said.

Easing measures should help to boost property sales transactions and market sentiment in the near term. They should also help improve developers' and local governments' cash flow situation and mitigate the slowdown in property construction activity, she said.

The Chinese property market suffered a notable downturn in 2014, with falling prices and sluggish sales. Official data showed out of 70 major Chinese cities, new homes in 68 saw month-on-month price declines in August, compared with 64 in July.

Liu Bo, analyst with the China International Capital Corporation (CICC), said Tuesday's announcement indicated the government is cutting its administrative intervention in the real estate market.

The administrative measures introduced since the second half of 2010 to control the property market are being phased out and real estate policies have begun to normalize. This will help eliminate market distortions caused by administrative measures, he said.

New policies will support demand for housing improvement and housing as an investment, and will effectively alleviate concerns about a dramatic housing market correction, Liu said.

Guan Qingyou, senior analyst at Minsheng Securities' research institute, said the announcement can be seen as a correction of the excessively tight property policies previously, and as a return of the policies to a normal state.

With relaxation of the lending rules, demand for bigger homes could burst in the near term, and demand for homes in first-tier cities and core areas of major cities could rebound notably, Guan said.

He also maintained that Tuesday's announcement shouldn't be interpreted as overall credit easing, since the government favors targeted, growth-supportive macro policies.

Guan highlighted the introduction of mortgage-backed securities and dedicated corporate bonds, which he said are expected to pull down high mortgage rates.

Wang, of UBS, also said that such policies are unlikely to reverse the property sector's structural downward trend or result in a visible rebound.

China's property sector has reached a structural turning point where supply has surpassed fundamental demand, she said.

Faced with high inventories and weakening investment demand due to shifting structural factors, construction is likely to slow further even with a short-term rebound in sales, Wang said.