Why hasn't the mortgage interest rate dropped?, August interest rate cut rigid | housing | mortgage interest rate
The interest rate cut in August arrived as scheduled, but to market expectations, the LPR for mortgage interest rates with a reference period of 5 years or more was not adjusted.
On August 21st, the People's Bank of China authorized the National Interbank Funding Center to release the latest 1-year LPR of 3.45%, a 10 basis point reduction; The LPR for a period of more than 5 years is 4.2%, which remains unchanged. LPR reappears "asymmetric" interest rate cuts.
LPR over 5 years is the anchor of mortgage interest rates. The mortgage interest rate is formed by adding points on the basis of LPR over 5 years.
Does not adjusting the LPR for a period of more than 5 years mean that the expectation of interest rate cuts for mortgage loans has fallen through? Why hasn't the August mortgage interest rate anchor been further adjusted, despite the official emphasis on supporting rigid and improved housing demand?
Based on a comprehensive analysis of the opinions of multiple experts, there are three main factors behind the maintenance of LPR over 5 years in August:
Firstly, this is to reserve space for the reduction of interest rates on existing housing loans.
Wen Bin, Chief Economist of China Minsheng Bank, believes that the adjustment of existing mortgage interest rates is imminent, and LPR quotes for more than 5 years remain unchanged, which is expected to reserve space for it.
The central bank has recently explicitly proposed to guide commercial banks to adjust the interest rates of existing personal housing loans in an orderly manner in accordance with the law.
Wen Bin believes that in the current situation where there are changes in the investment and asset allocation behavior of residents, and the interest rates of newly issued housing loans have been significantly reduced but with limited effects, the reduction of existing mortgage interest rates can better stabilize expectations, real estate, and credit. It can also reduce the risk of idle arbitrage and regulate market order by reducing loan replacement behavior.
Since the beginning of this year, the interest rate spread between new and existing housing loans has increased. According to the central bank's report, as of the end of June, out of all 343 cities, 100 cities have lowered or cancelled the lower limit of first home loan interest rates. According to institutional statistics, the lowest interest rate for first home loans in major cities has dropped to 3.6%, but the interest rate for existing first home loans is generally above 5%, with some cities even reaching over 6%. The highest difference between new and old interest rates is about 2.4 percentage points.
Wen Bin believes that in the current environment where new loan interest rates have dropped to historic lows, there is ample room for local policies, and bank interest rate differentials continue to be under pressure, in order to maintain a reasonable profit level for banks, keeping LPR quotes for loans over 5 years unchanged can leave room for accelerated implementation of existing mortgage interest rates.
Wang Xiaoqiang, Chief Analyst of Zhuge Data Research Center, also believes that the failure of the expected reduction in LPR for more than 5 years may indicate that the pricing relationship between incremental and existing mortgage rates is currently being coordinated. There is a significant interest rate difference between the current incremental and existing mortgage interest rates, and the expectation of a reduction in existing interest rates is gradually increasing. However, no relevant detailed rules have been issued yet.
Secondly, simply lowering mortgage interest rates at present cannot fundamentally and effectively solve the problems in the real estate market.
Pang Ming, Chief Economist and Director of Research at JLL Greater China, stated that currently, simply using monetary policy methods such as lowering mortgage interest rates cannot completely, effectively, and fundamentally solve the superposition of cyclical, structural, and trend problems in the real estate market.
He believes that as long as each region can adjust and optimize local real estate policies in a step-by-step and differentiated manner according to its actual situation, effectively implement policies tailored to the city, one city, one district, and make full use of the policy toolbox, follow up with central government policies to launch relevant supporting measures and ensure their implementation and effectiveness, and implement a long-term mechanism for the real estate market, the stable recovery and long-term healthy and sustainable development of the real estate market can still be achieved.
In addition, he pointed out that the dynamic adjustment mechanism of housing loan interest rates and the adjustment mechanism of existing housing loans can better meet the demand for rigid and improved housing, help the stable and healthy development of the real estate market, and help reduce the phenomenon of early repayment and illegal lending behavior driven by the interest rate difference between existing and new housing loans.
According to a study by Zhongzhi Research Institute, in June this year, after a 10 basis point reduction in LPR for more than 5 years, the short-term real estate market is expected to experience some recovery, but it has not changed the sluggish trend of the real estate market.
According to data from the China Index, in July, the transaction area of new houses in key 100 cities decreased by nearly 30% month on month, with a year-on-year decrease of over 30%. Since August, sales in key cities have not improved, and the weekly average transaction volume of commercial residential properties has further decreased compared to the weekly average in July and the same period last year. Homebuyers are in a wait-and-see mood. Overall, interest rate cuts are beneficial for reducing home purchase costs for homebuyers and to some extent repairing market expectations. However, their driving effect on housing demand is limited. More coordinated optimization of real estate policies may be necessary to promote substantial recovery of housing market expectations.
Thirdly, if the LPR is not lowered for more than 5 years, the mortgage interest rate will not be further lowered.
The current LPR for loans over 5 years is the lowest level since the 2019 mortgage interest rate anchor change. According to the monitoring of the China Index Research Institute, the interest rate on first-time home loans in some cities has dropped to 3.6%, approaching the lowest historical level. Overall, the institution believes that there may not be much room for LPR to be lowered.
However, it should be noted that this does not mean that the expectation of reducing mortgage interest rates has been dashed. Zhongzhi Research Institute believes that in the future, more cities with high pressure to adjust housing prices may lower mortgage interest rates and lower home purchase costs by lowering the markup. For example, Xiamen has recently introduced an optimization policy for housing loan interest rates. Starting from August 17th, the lower limit of interest rates for second home loans in Xiamen has been adjusted from LPR+80BP for loans with a term of more than 5 years to LPR+60BP. In addition, the process of lowering the interest rates on existing housing loans is expected to accelerate, thereby unleashing the consumption potential of residents.
According to statistics from Beike Research Institute, the average interest rates for first and second home loans in 100 cities in August were basically the same as last month. The average mainstream interest rate for first home loans was 3.90%, and the average mainstream interest rate for second home loans was 4.81%; The average lending cycle of banks in August was shortened compared to the previous month, and the lending speed was the fastest since 2019. After August 15th, some cities will adjust their mortgage interest rates, and it is expected that the average mortgage interest rate in September will decline.
