Chinese banks raise mortgage rates, helping to rein in runaway prices that puts housing affordability further out of reach

Shenzhen, Nanchang, Hangzhou are among the cities that have seen rising mortgage rates for first-time borrowers and second-home buyers
The national average mortgage rate for first-home buyers rising 11 basis points since January to 5.33 per cent in May

Property financing

Lam Ka-sing

Published: 8:45am, 22 May 2021

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Commercial banks across several Chinese cities have begun raising their mortgage rates, as they increase the cost of buying homes to help the government keep a lid on speculative buying that is fuelling a runaway housing bubble.

In southern China’s technology metropolis Shenzhen, nine banks followed China Construction Bank in raising the mortgage rate for first-time buyers by 15 basis points to 5.1 per cent, while second-home buyers have to pay 5.6 per cent for loans, up 35 basis points.

Even in smaller cities like the Jiangxi provincial capital of Nanchang, with a population of 5 million people, the rate for first-home loans has jumped by 47.5 basis points to 6.125 per cent at the Industrial and Commercial Bank of China and Agricultural Bank of China, while other banks raised their rates to 5.88 per cent, according to a May 12 survey by the real estate agency Leju. Second-property buyers had to pay between 5.8 per cent and 6.37 per cent.

“Mortgage rates fluctuate [because] a few cities had a sudden increase in transaction volume [and] a rising demand for housing loans,” said Zhang Dawei, the chief analyst at Centaline Property Agency, adding that rate changes are also related to the credit capacity of various banks, and whether they have reached the regulatory limit for loans.

Commercial real estate in Wanan county in Jiangxi province in southeastern China on April 4, 2018. Photo: SCMP Pictures

Chinese authorities, anxious to maintain social stability during the centenary year of the ruling Communist Party, are rushing to keep the lid on housing prices and other political hot button issues. Last month, China’s home prices soared by 0.5 per cent across 70 cities tracked by the statistics bureau, at a pace that exceeded the previous month.

“Real estate is for living in, not for speculation,” goes the edict that was reiterated several times by China’s President Xi Jinping. That has been translated into policy, underscored by the National 14th Five-Year Plan enacted in March.

An undated view of a housing estate in the Zhejiang provincial capital of Hangzhou. Photo: Shutterstock

China implemented an array of policies to tame the property market this year, including centralised land sales, preventing business loans from flowing to the housing market, discussions with local governments and crackdown on speculation.

That has extended to higher mortgage rates, with the national average mortgage rate for first-home buyers rising 11 basis points since January to 5.33 per cent in May.

The nationwide average for second-home buyers was 5.61 per cent, an increase of 8 basis points from January, according to data from Rong360 Big Data Research Institute that tracked 703 bank branches in 42 major cities.

The increase has also reached the Zhejiang provincial capital of Hangzhou, home of this newspaper’s owner Alibaba Group Holding. Banks in the city raised the borrowing cost for first-time borrowers by 20 basis points to 5.4 per cent, increasing the rate for second-home buyers by 12 points to 5.5 per cent.

“Many cities will join the ranks” of higher mortgage rates, said Yan Yuejin, research director of the Shanghai-based E-house China Research and Development Institute, adding that banks are exercising more restraint in their credits because of higher turnover earlier.

Cherry blossoms at the Fenghuanggou scenic area in the Jiangxi provincial capital of Nanchang on March 20, 2021. Photo: Xinhua

“Existing tightening measures have yet to stabilise property prices, which implies the government will unlikely scale back those measures in the near term,” BofA Securities said in a report on Friday.

One of the biggest changes is that banks have seen a collective upwards adjustment in mortgage rates, reflecting a consensus that banks generally feel pressure, Yan said. So everyone has adjusted the interest rate in a unified way with a tacit understanding.

“This year, banks will have to take greater responsibility for keeping speculation away from the housing market,” Yan said. “[They] must be held accountable for credit misallocation. The control of mortgage quotas since last year, in fact, does have an impact on loan flows and interest rates. It will indeed be tightened [continuously].”

Higher “borrowing costs can reduce investment needs and will indeed cool the property market,” said Yan. “There is also a possibility of a 5 per cent drop [in transaction volume].”