The real estate market may be the main target of the interest rate rise this
time as prices have been climbing in some areas and the sector relies heavily on
the banking industry.
Housing prices in 70 large and medium Chinese cities rose an average of 5.5
percent in the first quarter from the same period in 2005, the National
Development and Reform Commission's recent report shows.
Prices in Dalian, a coastal city in Liaoning Province, rose 14.9 percent, the
highest of all cities. It was followed by Hohhot in Inner Mongolia, Shenzhen in
Guangdong Province, Chengdu in Sichuan Province, and Qingdao in Shandong
Province.
The benchmark rate for one-year loans will rise to 5.85 percent from 5.58
percent, up 0.27 percentage point, the People's Bank of China announced
yesterday on its Website.
Yi Xianrong, a research fellow with the Financial Research Center of the
Chinese Academy of Social Sciences, said the rate adjustment will be the most
effective way to drive speculative capital out of an overheated real estate
market.
Yi said the housing price spike in the UK halted after the central bank
raised mortgage loan interest rates five times in a row in 2003. The escalating
housing price in the US real estate market also slowed down after the rates were
raised 15 times last year.
Despite the rate increase putting more burden on home buyers in the short
term, Yi said it will result in housing prices falling and will be good for
potential home buyers in the long run.
"When the total price of an apartment drops, buyers are able to pay a higher
downpayment and feel less pressured from the rate change," he said.
As most banks opt for a 10 percent discount of the central bank's benchmark
rate to woo loan applicants, the annual interest rate for a house mortgage
before yesterday was 5.78 percent and the current rate is 6.05 percent.
So a home buyer who applies for a 500,000 yuan (US$62,500) loan spread over
20 years, the current monthly payment will be 3,596.59 yuan, a 77.6 yuan
increase from the previous 3,518.99 yuan.
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