(Bloomberg) -- China unveiled its biggest package yet to shore up its beleaguered property market, lowering borrowing costs on as much as $5.3 trillion in mortgages and easing down-payment requirements for second home purchases to a historical low.
The People’s Bank of China will cut outstanding mortgage rates for individual borrowers by an average of 0.5 percentage point, Governor Pan Gongsheng said at a press conference on Tuesday. The minimum down-payment ratio on second home purchases will be lowered to 15% from 25%.
The plan, confirming earlier reports by Bloomberg News, underscores Beijing’s urgency to stem a housing-led slowdown in Asia’s largest economy as it faces the prospect of increasing protectionism and a shaky global outlook. The moves comes as economists at banks including UBS Group AG, JPMorgan Chase & Co. and Bank of America Corp. predicted that China will fall short of delivering on its growth target this year.
A Bloomberg Intelligence gauge of Chinese property developer shares rose as much as 4.9% on Tuesday morning before paring the gain to 1.5% as of 10:10 a.m. The index has slid 33% from this year’s high in mid-May.
“This package is China’s biggest and widest supporting measures on home loans yet, as it covers both new home-buying and outstanding purchases,” said Yan Yuejin, vice president of Shanghai E-house’s research arm.
Policymakers have taken forceful steps to lower financing costs this year including scrapping a central government-guided mortgage rate floor for first home purchases. But such moves have mostly benefited new property buyers, exacerbating the disparity with existing homeowners that has driven a wave of early mortgage repayments and strained lenders in recent years.
Currently, existing mortgages carry an average interest rate of about 4%, compared with 3.2% on newly-issued loans for a first home and 3.5% for a second home, according to data compiled by China Real Estate Information Corp. in late August.
The move will ease mortgage burdens an estimated 150 million people, cutting their annual interest expenses by about 150 billion yuan, Pan said. While China has pushed average mortgage costs to a record low this year, most households haven’t benefited because banks won’t reprice existing loans until next year.
Still, it will likely add pressure on the nation’s biggest banks, which have been struggling with record low margins, sinking profits and rising bad loans.
Pan said the new round of interest rate adjustments will have a neutral impact on bank profits and margins, given that more funding is freed up and deposit rates will follow suit. Officials also announced on Tuesday they would add capital to the largest lenders.
Banks have resorted to multiple deposit rate cuts to mitigate the impact of lower loan rates. Combined profits at China’s commercial lenders rose 0.4% in the first half, the slowest pace since 2020, according to official data. The sector’s net interest margins have continued to decline, hitting a record low of 1.54% at the end of June, well below the 1.8% threshold regarded as necessary to maintain reasonable profitability.
The reduction to the minimum down-payment ratio for second-home buyers follows a sizable cut to 25% in May. Top regulators have said China will support homebuyer demand to upgrade to bigger homes.
China’s real estate crisis is now into its fourth year with no signs of letting up. The slump in home sales deepened in August as the impact of policy loosening measures waned and buyers were deterred by expectations for prices to keep falling.
--With assistance from Zheng Li.
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