VIEW: Nomura: Beijing Cuts Min Mortgage Rate, But We See Little Impact

In the wake of the mortgage rate tweaks for first time property buyers Nomura note that “although we expect this cut to provide a benefit, the positive impact could be quite limited.”

• “Despite the spate of easing measures introduced across dozens of cities, new home sales growth in both volume and value terms crashed to -61.2% and -58.6% Y/Y, respectively, for the top 100 developers in April, due to the Omicron wave and the massive lockdowns across China. We believe a rise in uncertainty, a lack of confidence, an increase in the unemployment rate and falling income growth have all contributed to the slump in new home sales. With no reopening in sight, a small cut to the lower limit for mortgage rates provides little support to potential first time home buyers, as most of them are young college graduates and migrant workers who have been hit hard by the current lockdowns. We also note that the minimum mortgage rate for second-time homebuyers - who tend to be in a better financial position - was not cut. Indeed, banks have already lowered local mortgage rates by average of 20-60bp since March, but new home sales worsened further anyway.”
• “Second, according to the Beike Research Institute, a comprehensive housing service platform in China, first-time home buyers paid an average mortgage rate of 5.2% in April, which is 60bp above the previous lower limit of 4.6%; this suggests the lower limit is not binding in most cases and a 20bp cut to this non-binding minimum mortgage rate will not have much real impact.”
• “Third, there is a big difference between cutting LPR and setting a lower minimum mortgage rate. Mortgage rates in China are adjustable rates that use the LPR as the benchmark. Merely cutting the minimum mortgage rates by 20bp without touching the LPR means that banks will not lose anything on existing mortgage loans and existing mortgage loans borrowers will not benefit from the cut (as of end-April, outstanding mortgage loans were at CNY38.7tn).”