Home ›› 19 Feb 2023 ›› Asia Biz
China has been cutting mortgage rates since last year to boost sales in its moribund property market, but the main result so far has simply been a rush by households to pay off existing mortgages early, potentially squeezing banks’ profits.
Analysts estimate that nearly $700 billion of mortgages – close to one-eighth China’s outstanding total – have been prepaid since early last year, when banks started to lower borrowing rates, reports Reuters.
Mortgage holders, feeling unduly burdened by the higher rates they took on in years past, are tapping their personal savings or taking out cheap loans under stimulus programs intended for big-ticket consumer purchases or for starting new businesses.
This threatens banks’ profits on mortgages, which accounted for about 30per cent of outstanding loans at China’s five biggest banks as of last June, according to their latest financial reports.
It also highlights, however, how mortgage rate cuts and other measures to aid China’s faltering property sector, hit by a slump in demand and a cash crunch at major developers, have yet to deliver a meaningful recovery, even as recent data show the market is stabilising. Analysts expect a recovery will only kick in towards the second half of this year.
“From the banks’ point of view, early mortgage repayment means funds are paid back to banks, and could help fund new mortgage loans, but the issue is poor buying sentiment,” said Yan Yuejin, an analyst at E-house China Research and Development Institution, a Shanghai-based property services company.
The current disinterest in new home purchases contrasts sharply with the overheated property market of prior years, when authorities kept mortgage rates high to cool
speculation.
About 17.7 trillion yuan ($2.6 trillion) of mortgages, nearly half the current outstanding total, were granted between the fourth quarter of 2017 and the first quarter in 2022 at relatively high rates of 5.26per cent to 5.72per cent, said Judy Zhang, a banking analyst at Citigroup.
Towards the middle of last year, however, regulators began lowering benchmark mortgage rates to prop up property demand, after a liquidity crisis among developers sent home prices and sales into a downward spiral.
According to a survey by Chinese mortgage data provider Rong360 in January, the average mortgage rate for first-time home buyers in December was 4.16per cent, down 137 basis points from a year earlier and the lowest since the survey began in 2015.
