Can China rescue its rapidly cooling property market?

The People’s Bank of China and the China Banking Regulatory Commission have eased mortgage lending restrictions for the first time since the global financial crisis in an effort to boost the ailing property sector, which is regarded as the weakest link in the country’s slowing economy.

There had been wild market speculation for weeks leading up to the bombshell announcement made last night, just before the week-long National Day holiday. People applying for a mortgage to buy a second home may now be eligible to pay less of a down payment and take advantage of lower interest rates. Some second-home buyers will be able to enjoy the same interest rates and down payment levels that were previously only available to first-home buyers, according to a statement posted on the central bank’s website.

Under China’s existing rules, first home buyers need to cough up at least a 30 per cent down payment, but, for people who want to buy a second home, a down payment of 60 per cent is required. Banks are barred from lending money to people who want to buy third or subsequent property.

Commercial lenders will also now be permitted to offer as much as a 30 per cent discount on the central bank’s benchmark lending rates to eligible home-buyers.

These draconian property restrictions were introduced more than four years when China’s property market was red hot and the central government was concerned about skyrocketing home prices. Many cities also imposed limits on home ownership in a bid to curb property speculation.  

The central bank also calls on banks to offer more support to Beijing’s affordable housing projects and even urges them to consider issuing mortgage-backed securities and long-term bonds to finance the borrowing needs of first-time home buyers.

Yesterday’s announcement, arguably the most aggressive measure to date, is aimed at rescuing China’s rapidly cooling housing market. The real estate sector accounts for about 16 per cent of China’s GDP, 33 per cent of fixed-asset investment, 20 per cent of outstanding loans, 26 per cent of new loans and 39 per cent of government revenues in 2013.

Home sales plunged 11 per cent during the first eight months of the year and prices also dropped in 68 of the 70 cities tracked by the central bank. The share prices of listed property developers have also taken a hit amidst growing fear of a potential crash in China’s property market.

However, Chinese analysts are divided about the potential impact of the central bank’s easing measure on the property market. The real estate research team from CITIC bank, one of the largest brokerage houses in China, is the most upbeat. Its analysts say the move is by far the strongest easing measure since the height of the global financial crisis in October 2008. They believe this measure will have an “extremely large” impact on the market.

“Home prices in first- and second-tier cities will rebound in October and the pace of dropping home prices will slow down and eventually end the cycle of decline. Key property developers will perform well,” says the CITIC research team. 

Though other analysts are generally positive about the central bank’s latest move to boost an ailing market, they are less sanguine about the potential impact on the housing market. 

Ren Zheping, chief macro-research analyst of Guotai Junan Securities Co, says the move is most forceful measure to date and it will have a positive impact on the real estate sector and the economy.  But he is less sure of how effective the measures will be and argues that banks might be reluctant to implement these measures given their more risk-averse culture of late.

Many argue that given the high cost of capital in China nowadays, it is very unlikely that commercial banks would actually implement the 30 per cent discount on benchmark rates for eligible home buyers.

It seems clear that the central bank is getting increasingly nervous about the state of housing market and is unveiling a string of new measures to boost the slowing property market.  However, it is still reluctant to make use of the most aggressive tools available, such as cutting benchmark rates and lowering reserve ratios.

Beijing is walking a tightrope between rescuing the all important housing market and keeping a lid on the country’s escalating debt problem.  Australian investors and policymakers need to keep a close eye on this sector, which will largely determine the health of our economy.