China Real Estate Research Institute: How will the implementation of multiple favorable policies by the central bank affect the real estate market?

According to the report released by the China Index Research Institute on the Zhitong Finance and Economics APP, on September 24th, the State Council Information Office held a press conference. Overall, this time the central bank released multiple heavy positive news, which will have a positive impact on the macroeconomy and the real estate market. The reserve requirement ratio cut and interest rate cut will boost the economy by releasing liquidity and lowering the cost of funds. The expected economic improvement is expected to repair residents' income expectations. Lowering the existing housing loan interest rates will further stabilize homebuyers' expectations, restore market confidence, and lower the 7-day reverse repurchase rate will further guide the downward trend of the 5-year LPR starting from October, continuing to reduce home purchase costs. Lowering the minimum down payment ratio for the second home will significantly reduce the threshold for residents to buy homes. With multiple measures in place, it is expected to stabilize housing prices and accelerate the bottoming out of the real estate market.

Furthermore, the report mentioned that this time the central bank also expanded the proportion of central bank funds supporting re-loans for affordable housing, which will help increase the scale of commercial bank loans and will have a certain positive impact on local land acquisition and storage. However, it is worth noting that the current process of local land acquisition and storage is relatively slow, with key influencing factors such as high land acquisition prices, difficulty in matching supply and demand, and high costs for local state-owned enterprises to acquire land. The current interest rate cut by the central bank can to some extent reduce the land acquisition costs for state-owned enterprises, but factors such as land acquisition prices and supply-demand mismatch may still require more policy support in the short term to help local governments accelerate the land acquisition process.

In addition, the introduction of incremental policies for active stock land, extension of the "16 financial measures," and the term of operational property loans will further increase support for corporate funds, which will play an important role in stabilizing corporate expectations and boosting market confidence.

On September 24th, the State Council Information Office held a press conference to introduce the relevant situation of financial support for high-quality economic development. People's Bank of China Governor Pan Gongsheng, China Banking and Insurance Regulatory Commission Director Li Yunze, and China Securities Regulatory Commission Chairman Wu Qing attended the event and answered questions from reporters. People's Bank of China Governor Pan Gongsheng announced a series of heavy measures such as reserve requirement ratio cuts, interest rate cuts, and adjustment of existing housing loan interest rates. At the same time, China Banking and Insurance Regulatory Commission Director Li Yunze also introduced the progress of the "white list" work.

Pan Gongsheng announced:

First, reduce the reserve requirement ratio and policy rates. The reserve requirement ratio will be lowered by 0.5 percentage points in the near future, providing about 1 trillion yuan of long-term liquidity to the financial market. Depending on the market liquidity conditions for the rest of the year, there may be further reductions of 0.25-0.5 percentage points. Lower the central bank's policy rates, with the 7-day reverse repurchase operation rate lowered by 0.2 percentage points from the current 1.7% to 1.5%, while guiding loan market quoted rates and deposit rates to decline simultaneously to maintain the stability of commercial banks' net interest margins.

Second, lower existing housing loan rates and unify the minimum down payment ratio for housing loans. Guide commercial banks to lower existing housing loan rates to near the rates of new loans, with an average expected reduction of about 0.5 percentage points. Unify the minimum down payment ratio for first and second homes, reducing the national minimum down payment ratio for second home loans from the current 25% to 15%. Increase the proportion of central bank funds supporting the 300 billion yuan affordable housing re-loans created by the People's Bank of China in May from the original 60% to 100%, enhancing market incentives for banks and acquiring entities Extend the deadline for the operating property loans due at the end of the year and the "16 Financial Policies" to the end of 2026.

Li Yunze said:

With the joint efforts of all parties, the urban real estate financing coordination mechanism has achieved good results. As of now, commercial banks have approved over 5700 whitelist projects, with approved financing amounting to 1.43 trillion yuan, supporting the timely delivery of over 4 million housing units. Under the guidance of the coordination mechanism, the support of financial institutions to the real estate industry is continuously expanding. By the end of August, real estate development loans this year have achieved positive growth compared to the beginning of the year, reversing the trend of continuous decline in recent years. M&A loans for real estate and housing rental loans have increased by 14% and 18% respectively, providing strong financial support for the stable and healthy development of the real estate market. At the same time, to actively support rigid and improvement-oriented housing demand, we will work with the People's Bank of China to guide local financial institutions to adjust relevant real estate financial policies according to local conditions. Next, we will also actively cooperate with the People's Bank of China to steadily reduce the interest rates on existing housing loans to further reduce residents' housing loan expenses and enhance the sense of gain for the people.

1. Reserve requirement ratio cuts and interest rate reductions boost market confidence and promote stable economic operation

In February, the central bank lowered the reserve requirement ratio by 0.5 percentage points, providing the market with long-term liquidity of about 1 trillion yuan, with the weighted average reserve requirement ratio for financial institutions at 7%. This time, the reserve requirement ratio is planned to be lowered by another 0.5 percentage points, providing long-term liquidity of about 1 trillion yuan to the financial market. After the implementation of the reserve requirement ratio cut, the average reserve requirement ratio for banks is about 6.6%, still with certain room for adjustment.

Chart: Average Reserve Requirement Ratio of Financial Institutions since 2019

Data Source: People's Bank of China, Zhongzhi Data CREIS

Pan Gongsheng also stated, "There are still three months until the end of the year, and depending on the situation, we may further reduce by 0.25-0.5 percentage points." This means that after this reserve requirement ratio cut, there is still a certain expectation of further cuts in the fourth quarter.

At the same time, interest rate cuts were also announced during this meeting. In July, the central bank lowered the 7-day reverse repurchase operation rate from 1.8% to 1.7%, and this time it was further reduced by 20 basis points to 1.5%. Under the market-oriented interest rate control mechanism, the adjustment of policy rates will drive the adjustment of various market benchmark rates. It is expected that the LPR and deposit rates in October will also decrease by 0.2-0.25 percentage points.

Under the combination of reserve requirement ratio cuts and interest rate reductions, more liquidity will be released and financing costs reduced, which is expected to boost market confidence and promote stable operation of the macroeconomy.

2. Guide the downward trend of new and existing housing loan rates, reduce housing purchase costs, and restore market expectations

Chart: Trends of 1-year and 5-year LPR

Data source: People's Bank of China, China Index Research Institute (CREIS)

Since 2024, the People's Bank of China has lowered the loan prime rate (LPR) for over 5 years twice, totaling 35 basis points to 3.85%. At the same time, the nationwide first and second home loan rate floors have been removed. Currently, except for Beijing, Shanghai, and Shenzhen where the loan rate floors have not been removed, other cities across the country have canceled the rate floors. The interest rates for new first home loans in multiple cities have dropped to around 3.2%, with some cities even lowering rates to below 3%.

In terms of the impact on housing prices, the average rent-to-sale ratio in the top 50 cities is 2.1%. On the cost of funds side, the 10-year national bond yield is around 2%, the interest rate for new individual housing loans in July was 3.4%, and the interest rate for first home provident fund loans over 5 years is 2.85%. Taking into account an average 30% down payment ratio (although the minimum down payment ratio has been reduced to 15%, residents' willingness to leverage may not be strong), the comprehensive cost of funds for residents to purchase homes is currently between approximately 2.6% to 3%. Lowering interest rates helps reduce the cost of home purchases for residents, bringing it closer to the rent-to-sale ratio and thereby stabilizing housing prices.

Chart: Average loan interest rates for personal housing loans from financial institutions

Data source: People's Bank of China, China Index Research Institute (CREIS)

Furthermore, due to previous constraints on the narrow net interest margin of banks, the reduction of existing home loan rates was limited. The recent reserve requirement ratio cut by the People's Bank of China has opened up space for this. Pan Gongsheng stated, "The reserve requirement ratio cut by the People's Bank of China is equivalent to providing banks with low-cost, long-term funds for operation directly. The medium-term lending facility and open market operations are the main ways for the People's Bank of China to provide commercial banks with medium-term funds, and the decrease in interest rates will also lower the cost of funds for banks."

During this press conference, Pan Gongsheng pointed out, "The People's Bank of China plans to guide banks to make batch adjustments to the interest rates of existing home loans, lowering them to near the rates of new loans. We expect the average decrease to be around 0.5 percentage points. We say 'average' because loans are issued at different times, in different regions, and by different banks, so the levels of existing home loan rates vary. We predict the decrease to be an expected average. Lowering the interest rates of existing home loans by banks is beneficial for further reducing borrowers' interest expenses. We estimate that this policy will benefit around 50 million households, 150 million people, reducing the total interest expenses of households by approximately 150 billion yuan per year. This will help promote expanding consumption and investment, reduce early repayment behavior, and also help curb illegal replacement of existing home loans, protecting the legitimate rights and interests of financial consumers and maintaining the stable and healthy development of the real estate market."

It is expected that the interest rates for first and second existing home loans will follow suit with adjustments. On one hand, this reduces the cost of home purchases for residents, promoting consumer spending and providing important support for the stable operation of the economy. On the other hand, it also helps restore market expectations, alleviate the wait-and-see sentiment due to expectations of declining mortgage rates, and together with the interest rate cut, further lowers the cost of home purchases for buyers, driving the release of housing demand

3. Lowering the threshold for the purchase of second homes to guide the release of demand for improved housing

The People's Bank of China has once again adjusted the down payment ratio for second homes to further support the release of demand for improved housing by residents. Pan Gongsheng pointed out that "in order to better support the rigid and diversified demand for improving housing for urban and rural residents, commercial individual housing loans at the national level will no longer distinguish between first homes and second homes, with a unified minimum down payment ratio of 15%. ... Differentiated arrangements may be adopted by various regions based on local conditions, and the minimum down payment ratio within their jurisdiction may be determined."

On May 17, the People's Bank of China and the China Banking and Insurance Regulatory Commission jointly issued a document, lowering the minimum down payment ratios for first and second home commercial loans to 15% and 25% respectively. Subsequently, various regions quickly followed suit. As of now, only Beijing, Shanghai, and Shenzhen have not yet lowered the down payment ratios for first and second home commercial loans to the national minimum.

Table: Current down payment ratios for commercial loans in Beijing, Shanghai, and Shenzhen

Data Source: People's Bank of China, China Real Estate Information Corporation (CREIS)

For most second and third-tier cities, the down payment ratio for second homes has already been reduced to a low level, so the effect of further lowering the down payment ratio may be limited. However, for core cities with high housing prices such as Beijing, Shanghai, and Shenzhen, most buyers of second homes usually complete the replacement by selling one property to buy another, needing to obtain funds for replacement after completing the transaction of existing properties. The previous high down payment ratio for second homes posed a certain restriction on purchasing new homes. The reduction of the down payment ratio for second homes will help alleviate the issue of having to buy before selling when switching homes, accelerating the circulation of the first and second-hand housing replacement chain.

After the implementation of this policy, it is expected that various regions will accelerate the implementation and lower the minimum down payment ratio for second homes to 15%. Beijing, Shanghai, and Shenzhen are also expected to follow suit. The reduction of the down payment ratio will further lower the threshold for home purchases, potentially driving the release of demand for improved housing into the market.

4. Providing more financial support for local state-owned enterprises in inventory clearance, but key factors affecting the pace of inventory clearance in the short term remain unchanged

On May 17, the People's Bank of China announced the establishment of a 300 billion yuan re-lending facility for affordable housing, guiding financial institutions to support local state-owned enterprises in acquiring completed but unsold commercial housing at reasonable prices for use in affordable housing projects for sale or rent. However, the overall progress remains relatively slow. According to data disclosed by the People's Bank of China, as of the end of June 2024, the balance of the 300 billion yuan re-lending facility for affordable housing was 121 billion yuan.

During this meeting, Pan Gongsheng stated that "to further enhance the market-oriented incentives for banks and acquisition entities, we will increase the proportion of People's Bank of China's contribution in the affordable housing re-lending policy from the original 60% to 100%. Originally, if a commercial bank provided 100 billion yuan, the People's Bank of China would provide 60 billion yuan. Now, if a commercial bank provides 100 billion yuan, the People's Bank of China will provide low-cost funds of 100 billion yuan, accelerating the process of clearing inventory of commercial housing." Increasing the central bank's contribution in the re-lending policy is conducive to expanding the scale of bank loans, and combined with the central bank's interest rate reduction policy, is expected to accelerate the process of local inventory clearance However, it is worth noting that state-owned enterprises still face difficulties in price matching and supply-demand mismatch in land acquisition, and these restrictive factors still exist in the short term. To accelerate the pace of state-owned enterprise land acquisition, further policy optimization may be needed, such as expanding the scope of land acquisition for existing purposes and increasing the range of acquisition targets.

5. Incremental policies to revitalize existing land are on the way, with more funds expected to accelerate the pace of local land resource revitalization and alleviate the financial pressure on real estate companies.

The central bank also proposed "supporting the acquisition of existing land by real estate companies. In addition to using some local government special bonds for land reserves, research is being conducted to allow policy banks and commercial banks to provide loans to support conditionally enterprise market-oriented acquisition of real estate companies' land, revitalize existing land, and alleviate the financial pressure on real estate companies. When necessary, the People's Bank of China can also provide re-lending support. This policy is still under research by us and the China Banking and Insurance Regulatory Commission."

In order to revitalize existing land, the Ministry of Natural Resources has previously issued a document clarifying that for the acquisition of land for affordable housing, support can be provided through funds such as local government special bonds. The central bank further clarified the policy of funding support for enterprise market-oriented acquisition of real estate companies' land under certain conditions, and providing re-lending support when necessary. This means that more complementary funds will enter the market in the future. On the one hand, for high-quality real estate companies, they can actively seek loan support to acquire quality land from financially troubled real estate companies, expand land reserves, and revitalize existing land. On the other hand, selling existing land by financially troubled real estate companies is also conducive to alleviating financial pressure and further stabilizing market expectations.

6. Extension of commercial property loans and the "16 Financial Measures" to the end of 2026 will alleviate the financial pressure on real estate companies

Extending commercial property loans will enhance the debt repayment ability of some real estate companies. In January, the central bank and the China Banking and Insurance Regulatory Commission jointly issued the "Notice on the Management of Commercial Property Loans," allowing commercial property loans granted to real estate development enterprises with standardized operations and good development prospects to be used to repay the companies' existing loans and publicly issued market bonds by the end of this year. This policy has been extended to the end of 2026. For real estate companies with a large number of commercial real estate projects and stable operations, such as China Resources Land, Longfor Group, China Merchants Shekou, China Jinmao, and New World Development, this is a great benefit, as these companies can use commercial property loans to repay debts and further enhance their debt repayment ability. In April, the Shanghai branch of the central bank convened a signing ceremony for commercial property loans with 8 major commercial banks in Shanghai, as well as 12 real estate companies including Longfor Group, Zhangjiang Group, Nanfeng Group, and Dahua Group, with a total loan amount of 14.6 billion yuan.

The extension of the "16 Financial Measures" will also alleviate the debt repayment pressure on real estate companies. In July 2023, the central bank and the China Banking and Insurance Regulatory Commission issued a notice, clarifying that the application period for the real estate "16 Financial Measures" policies released by the central bank and the former China Banking and Insurance Regulatory Commission in November 2022 has been uniformly extended to December 31, 2024. This press conference pointed out that the application period for the real estate "16 Financial Measures" policies has been extended to the end of 2026, indicating that financial institutions will be able to further extend existing financing such as development loans and trust loans for real estate enterprises. From January to August 2024, the total sales of the TOP100 real estate companies decreased by 38.5% year-on-year, the total funds in place for real estate development enterprises decreased by 20.2% year-on-year, and the total amount of real estate industry bond financing decreased by 29.7% year-on-year In the case where real estate sales and financing are still significantly declining, the extension of existing development loans and trust loans by real estate companies can effectively alleviate their debt repayment pressure.

7. The continuous advancement of the "White List" project is showing results

Li Yunze pointed out, "As of now, commercial banks have approved over 5700 projects on the 'White List', with approved financing amounts totaling 1.43 trillion yuan, supporting the on-time delivery of over 4 million housing units. With the drive of the coordination mechanism, the support from financial institutions to the real estate industry is continuously expanding. By the end of August, our real estate development loans for this year have achieved positive growth compared to the beginning of the year, reversing the downward trend of real estate development loans. M&A loans in the real estate sector and housing rental loans have also increased by 14% and 18% respectively, providing strong financial support for the stable and healthy development of the real estate market."

In the future, the project financing "White List" mechanism will continue to advance, playing an important role in "ensuring housing delivery" and alleviating corporate funding pressure, further easing residents' concerns about the delivery of pre-sold houses and helping to restore the confidence of homebuyers