China slashes mortgage reference rates to revive property market

© Reuters. Mainland Chinese tourists walk in front of the skyline of buildings at Tsim Sha Tsui, in Hong Kong, China May 2, 2023. REUTERS/Tyrone Siu

SHANGHAI/SINGAPORE (Reuters) -China announced its biggest ever reduction in the benchmark mortgage rate on Tuesday, as authorities sought to prop up the struggling property market and broader economy.

The 25-basis point cut to the five-year loan prime rate (LPR) was the largest since the reference rate was introduced in 2019 and far more than analysts had expected.

“This is the biggest signal. In other words, the largest interest rate cut cycle in history has begun,” said Yan Yuejin, analyst at E-House China Research and Development Institution. The cut will directly impact the real estate sector by lowering mortgage costs, he said.

The five-year loan prime rate (LPR) was lowered by 25 basis points to 3.95% from 4.20% previously, while the one-year LPR was left unchanged at 3.45%.

Most new and outstanding loans in China are based on the one-year LPR, while the five-year rate influences the pricing of mortgages.

In a Reuters poll of 27 market watchers conducted this week, 25 expected a reduction to the five-year LPR. They projected a cut of five to 15 basis points.

The yuan fell to its lowest since Nov. 20 but has since trimmed losses while property stocks rose.

China last trimmed the five-year LPR in June 2023 by 10 basis points.

Beijing has stepped up efforts to rescue the ailing property sector, but the measures have come in fits and starts, weighing heavily on a sector that drives a quarter of the economy and on the stock market. New home prices saw their worst declines in nine years in 2023, while the stock market is languishing after hitting five-year lows.

Government-backed media last week reported that state banks have boosted lending to residential projects under the “white list” mechanism aimed at injecting liquidity into the crisis-hit sector.

Most analysts and investors are waiting for more measures to boost consumption and put a floor under property prices, their hopes higher after authorities replaced the chairman of the market regulator just before the Lunar New Year break.

“I think this move is more signal than substance,” said Ben Bennett, Asia-Pacific investment strategist at Legal and General Investment Management in Hong Kong. “Most people aren’t buying houses because mortgage costs are too high, they’re worried about developers going bankrupt and house prices falling.”

“But it does signal a determination to support the housing market. We need to see if this is followed up with more cash injections into lenders, housing projects and developers.”

More easing could be coming. Recent deposit rate cuts and the reduction to bank reserves are giving commercial banks space to reduce borrowing costs to support the economy.

While the new mortgage reference rate comes into effect immediately, existing mortgage holders will not benefit from any reduction in loan repayments until next year, as mortgage rate repricing is on a yearly basis.

The LPR, which banks normally charge their best clients, is set by 20 designated commercial banks who submit proposed rates to the central bank every month.