Homebuyers taking note of cheaper loans

The number of people showing an interest in home purchases surged after the interest rate cut on Friday, Nov 21, potentially heralding an uptick in a property market that was already on a tentative recovery track.

The 40-basis-point lending rate cut, unexpectedly announced by the People's Bank of China, makes mortgages cheaper. The benchmark rate for five-year and longer loans fell to 6.15 percent from 6.55 percent, which means that a typical homebuyer who borrows 1 million yuan ($163,000) under a 20-year repayment term will pay 234 yuan less per month.

Industry insiders hailed the move as another shot in the arm for the market.

Less than two months ago, many in the industry said that the PBOC's move to ease mortgage terms lacked a critical factor: Although the central bank allowed a discount of up to 30 percent on interest rates for first-time homebuyers, in reality few banks offered such a discount.

The problem has been at least partly resolved: The cut on Nov 21 amounts to 6 percent off for all and 15 percent off for first-time homebuyers.

Homebuyers were quick to take note. According to housing brokerage 5i5j Real Estate, on the day after the central bank announcement, visits to its outlets in 12 cities by people who wanted to sell the units they owned and those who sought to buy them, rose more than 50 percent in total over the previous Saturday. In Beijing alone, the number of people seeking to sell existing homes and who visited the outlets to check out the market surged 140 percent over the previous Saturday. Visits by potential buyers rose 95 percent.

However, Bai Yanjun, chief analyst at the China Index Academy, said that if the latest rate cut was not followed by more cuts in the coming months, the thaw could be short-lived as inventories, even in first-tier cities, are high.

High inventories will force developers to concentrate on fast asset turnover instead of preserving margins, and although sale volumes will expand, prices are unlikely to rise this year, Bai said.

Nonetheless, a property market recovery was in progress even before the rate cut, particularly in first-tier cities. In October, pre-owned apartment prices in the top four cities (Beijing, Shanghai, Guangzhou and Shenzhen) stopped declining, according to the National Bureau of Statistics. Prices in Beijing even rose 0.3 percent from September.

But the situation remains gloomy in third- and fourth-tier cities, many with mounting numbers of unsold houses. Dwindling population inflows, and even net outflows, mean that few will be willing to bet on houses even if borrowing costs ease.

Lower lending rates also mean reduced financing costs for developers. But Bai pointed out that because banks restricted lending to smaller developers, lower rates will not mean much to those firms. Developers will only benefit from lower lending rates from sources beyond the banks.