DDN Business Insider | Under possibly lower interest rates for existing mortgage loans: How will RMB38 tn in mortgage funds affect mainland market?
Editor's note: Recently, Bloomberg quoted insiders saying that the mainland is considering further reducing the interest rates on existing mortgages, allowing up to 38 trillion yuan in existing loans to seek refinancing. If this policy is implemented, it would mark the first time since the global financial crisis that China allows this operation known as "refinancing." So, what does this mean for the real estate market, the financial market, and the Chinese economy?
【Anchor】Hello everyone, welcome to DDN Business Insider. I am Yunfei Zhang. Recently, Bloomberg quoted insiders saying that the mainland is considering further reducing the interest rates on existing mortgages, allowing up to 38 trillion yuan in existing loans to seek refinancing. If this policy is implemented, it would mark the first time since the global financial crisis that China allows this operation known as "refinancing." So, what does this mean for the real estate market, the financial market, and the Chinese economy? To discuss these issues, we have invited Lu Wenxi, market analyst from Shanghai Centaline property, Ren Guoxin, General Manager of Shanghai Shenghesheng Real Estate Co., Ltd. and Tan Haojun, financial commentator and part-time professor at Zhongnan University of Economics and Law. Welcome, everyone!
【Anchor】As of now, this "refinancing" policy has yet to be confirmed. However, after the news broke at the end of last month, both the mainland and Hong Kong stock markets responded positively in the real estate sector. Some experts believe that if the policy is enacted, it could put pressure on the banking industry. First, I would like to ask Mr. Lu, how does this policy work, and what kind of ripple effects can we expect?
This will definitely put some pressure on banks. First of all, most of the banks' profits come from interest margins. For example, if the loan interest rate is 5% and the deposit or savings rate is around 3%, that leaves a 2% margin. Now, with the current trend of interest rate cuts, the lending rates are getting lower and lower; in some places, mortgage rates are as low as the 2% range, even below 3%. We can see that most banks are offering savings rates in the low 1% range, which means their interest margin is shrinking to around 2%.
So, in this situation, if we further compress loan interest rates, the profit margins for banks will continue to shrink.
【Anchor】Yes, in the context of declining interest rates, Mr. Ren, what do you think is the internal logic of this policy? What impact will it have on the overall economy in the mainland?
The mechanism of this policy mainly operates in several aspects. For homebuyers, lowering the interest rates on existing mortgages will directly reduce their monthly repayment burden and increase disposable income. It could stimulate consumption and improve quality of life. For the real estate market, reducing the burden on buyers helps stabilize market expectations and boosts buyer confidence, potentially stimulating real estate transactions. Additionally, it allows “refinancing” provides more options for buyers and promotes competition among banks, further driving the marketization of mortgage rates.
The ripple effects may include increased activity in the real estate market, which could drive growth in related industries such as building materials and home furnishings. Although banks may face pressure from narrowing interest margins in the short term, a vibrant real estate market could bring new business opportunities in the long run. Furthermore, this policy may influence financial market expectations, leading to fluctuations in the stock and bond markets.
【Anchor】Okay, Mr. Ren, how do you assess the scale of 38 trillion yuan? Is this amount large or small? What does it mean for the market?
A scale of 38 trillion yuan is indeed enormous. This scale indicates that existing mortgages hold significant importance in the financial system.
For the market, such a large volume of existing mortgages, if policy adjustments occur, will have a substantial impact. On one hand, it demonstrates the government's determination to stabilize the real estate market and alleviate the financial burden on residents, which could enhance market confidence. On the other hand, it also presents enormous challenges for banks and other financial institutions, requiring cautious responses to ensure financial stability.
【Anchor】Okay, Mr. Tan, what are your thoughts on the scale of 38 trillion yuan?
If the rumors are confirmed, this scale is still very large. Because in previous years, residents were very active in purchasing homes, and a significant number of residents have mortgages. In this context, if interest rates are reduced, a substantial portion of residents will benefit from the lowered rates on existing loans. The scale of 38 trillion yuan is indeed very substantial, and residents will benefit from the reduction in existing mortgage rates.
【Anchor】Okay, can this scale of funding provide ongoing confidence in the market economy? Mr. Lu, what do you think?
38 trillion yuan is quite a large number for the entire market. We know that even if just 1% of this capital is released, that would amount to over 300 billion yuan. Reports from the central bank indicate that in 2023, there was a significant reduction in existing loan interest rates, which saved around 170 billion yuan. If this 170 billion yuan were used in the consumer market, the impact on overall consumption would be very noticeable. For example, if it were used for automobile consumption, we know that cars not only drive their own industry but also have a multiplier effect, boosting related sectors like steel and plastics.
So, from this perspective, it will have a greater stimulating effect on the overall market economy.
【Anchor】In 2023, the mainland introduced the "830 policy" for the property market, which has now been in effect for a year. Data shows that over the past year, more than 1,200 property market policies have been released across the mainland, and the restrictions from the period of real estate overheating have basically been lifted. Mr. Lu, how do you evaluate the actual impact of real estate policies over the past year? What challenges does the real estate industry still face?
Since the implementation of the relaxed real estate policies over the past year, we can clearly observe some positive changes in the market. According to various statistics from the National Bureau of Statistics, we have seen improvements in construction starts and some marginal increases in housing prices. Although first-tier cities are still in a downward price trend, we have noticed in recent months that the rate of decline is narrowing, and stability is improving in terms of prices and transaction stability.
However, the industry still faces some pressure, particularly in terms of sales, where we are experiencing challenges in inventory clearance. Especially in third- and fourth-tier cities, the lack of demand is more pronounced. Conversely, first- and second-tier cities show some stability. We can see that when hot properties are launched in cities like Shanghai and Beijing, the market can still generate a positive response.
Currently, market expectations indicate that overall confidence is not particularly strong, so the speed of transactions is not very fast.
【Anchor】During the past year, about the measures implemented to promote a healthier property market, Mr. Ren, do you think they have achieved the desired effects? What issues remain unresolved in the real estate market?
Over the past year, the actual impact of the policies has been multifaceted. On the positive side, the large number of easing policies has effectively alleviated the financial pressure on real estate companies, stabilized market expectations, and prevented significant fluctuations in the real estate market.
At the same time, the measures that restricted the market during the overheating period have gradually been lifted, making the market more flexible and helping to meet reasonable housing demand.
However, the real estate industry still faces several issues. Firstly, market confidence has not fully recovered, and homebuyer sentiment remains cautious. Secondly, the debt issues faced by real estate companies remain severe, with some firms still experiencing tight cash flow, particularly among private developers. Additionally, there is still significant regional differentiation in the real estate market. In first-tier cities like Beijing and Shanghai, transactions are active, especially in prime locations, while third- and fourth-tier cities are under significant inventory pressure.
【Anchor】Regarding the reduction of mortgage rates and the allowance for refinancing, Mr. Tan, what kind of ripple effects do you think this could bring?
There may be temporary negative impacts on banks, but in the long run, it can be beneficial. If developers maintain their current state, with stagnant existing home sales and a high risk of cash flow issues, the impact on banks will also be significant. Many developers have substantial loans, and if they cannot repay them, the risks will ultimately be transferred to the banks.
Therefore, banks should prioritize long-term interests over short-term gains to improve their lending environment and reduce risks. Otherwise, future risks will continue to escalate.
【Anchor】Mr. Ren, how do you evaluate the impact of reducing existing mortgage rates on banks? Could this lead to new financial risks?
Reducing existing mortgage rates and allowing for refinancing will indeed have an impact on banks. Banks may face pressure from declining interest margins and reduced profits. Additionally, refinancing could lead to customer attrition and increased operational costs for banks.
From a risk perspective, there may be short-term liquidity and credit risks, but if banks strengthen their risk management, conduct stress testing, and implement risk warnings, these risks can be controlled. It is essential for banks to enhance their risk management by closely monitoring market dynamics, improving customer credit assessments, and optimizing their asset-liability structures.
【Anchor】Mr. Lu, what impact do you believe this policy will have on the banking industry? Could it lead to systemic financial risks?
If the interest rates on existing loans are allowed to be lowered or if refinancing is permitted, it will definitely have an impact on banks' revenues. Currently, loan interest rates are quite low, which means that the previous higher rates on existing loans represent a significant source of profit for banks. If these higher rates are replaced with lower ones, it will result in a loss of income for the banks.
Of course, this also introduces certain risks. When refinancing or transferring loans, it’s crucial to assess whether the borrowers have reasonable requests. For instance, if a borrower uses business or consumer loans to replace their regular mortgage, we need to reassess their repayment ability.
【Anchor】Finally, Mr. Lu, what is your prediction for the direction of the real estate market in the fourth quarter of this year?
In the fourth quarter, I personally predict that the real estate market will continue on a stable trajectory. Currently, some data points indicate improvements. We can expect traditional seasonal fluctuations in sales during September and October. Against this backdrop, market transaction volumes should trend towards further stabilization. As long as transaction volumes stabilize, we can anticipate a narrowing of the price adjustment space.
【Anchor】Okay, Mr. Tan, how do you view the direction of the real estate market in the fourth quarter?
The market outlook for the fourth quarter is not overly optimistic. Due to policy effects, we may see some stable trends. It’s unrealistic to expect significant improvements in the real estate market during this period. The control does not lie with developers, banks, or the government, but rather with the broader population of residents.
If individual homeowners' purchasing intentions are not strong and their economic circumstances are weak, then additional policies will have little impact on them. Therefore, I would say that in the fourth quarter, first, housing prices may continue to stabilize or experience mild declines; second, sales will be orderly and stable without major fluctuations; and third, consumer enthusiasm among homeowners will not see significant increases.
【Anchor】Regarding the upcoming trends in the real estate market, Mr. Ren, how do you see it? Will it have any impact on the overall economy for the year?
I expect the real estate market in the fourth quarter to gradually stabilize. With ongoing policy support and a gradual recovery in market confidence, real estate transactions may see some improvement.
However, due to existing uncertainties in the market, the likelihood of significant price increases is very low. The stability of the real estate market is crucial for overall economic stability. If the market can continue to recover, it will stimulate the development of related industries, promote investment and consumption, and provide positive support for economic growth throughout the year. Conversely, if the real estate market continues to be sluggish, it could apply pressure on economic growth.
【Anchor】Mr. Tan, how do you evaluate the current state of the real estate market?
Overall, the real estate market should be viewed in such a way that it is neither overly optimistic nor overly pessimistic. We should not expect significant changes in the market, but there is also no need to worry about a notable deterioration in the market.
From a broader perspective, the market is slowly trending in a positive direction. To truly overcome the current challenges in the real estate market, we may need to wait until next year or the year after to see changes in the overall economic environment. Additionally, we should look at changes in the policy environment, shifts in consumer demand and attitudes toward home buying, especially among young people, and the development of the real estate rental market. If these areas are addressed effectively, the market can maintain a relatively stable and gradual development trend, which will be more conducive to the healthy, orderly, and sustainable development of the real estate sector.
【Anchor】OK, thank you. That's all for this episode. Remember to follow us on YouTube or download our APP. I'm Yunfei Zhang, thanks for watching, and see you next time.
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