24 May 2019
Rising mortgage rates have weakened housing demand in China. Photo: AFP
Rising mortgage rates have weakened housing demand in China. Photo: AFP

Why China’s property boom may soon falter

Past efforts by local and central governments to cool the mainland housing market had failed largely because the loose monetary policy continued to support the sector.

But as China’s central bank has started to tighten monetary policy this year, mortgage loans have been creeping up. As a result, secondary housing prices are showing signs of weakness, a situation that could soon ripple through to the new-home market.

China has stressed that financial deleveraging is one of the key tasks this year. The one-year interbank rate or SHIBOR has risen to 4.406 percent, exceeding the one-year benchmark lending rate of 4.35 percent.

Meanwhile, the M2 growth rate has decelerated to 10 percent, from 15 percent in 2010-2011.

Many cities have witnessed rising mortgage interest rates. In Beijing, the rate for first-home buyers has been raised to 110 percent of the benchmark, and 120 percent for second homes.

Last year, some banks offered as much as 30 percent discount on mortgage loan interest rates.

Homebuyers with a 30-year 5 million yuan (US$735,460) mortgage may need to pay another 6,000 yuan interest each month after the rate increase. And they need to pay 2 million yuan more throughout the 30-year period.

Rising mortgage rates have thus weakened housing demand. Home owners are reportedly more willing to offer steep discounts to lure buyers.

For example, a home owner in a popular school district in Beijing has cut the offer price by nearly 1 million yuan in 20 days. But the seller has yet to find a serious buyer.

Meanwhile, the public has turned bearish on housing prices. The home purchase confidence index eased to 103.03 points in May from 103.67 points in the previous month, marking the first decline so far this year.

Also, the realtors’ confidence index also fell to 107.3 points in May from 111 in April.

The housing sector contributed to 6.5 percent to China’s GDP last year. It remains a pillar industry. Local governments are heavily relying on revenue from land sales for expenditures and debt servicing.

Would falling home prices hit the economy hard?

The good news is that along with the global economic recovery, industries, exporters and raw material producers have all started to pick up. This will cushion the impact of a weakening property sector.

This article appeared in the Hong Kong Economic Journal on June 9

Translation by Julie Zhu

[Chinese version 中文版]

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HKEJ columnist

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