China will lower mortgage rates on existing home loans to a level similar to those of newly issued housing loans, Pan Gongsheng, governor of the People’s Bank of China (PBOC), said at a press conference held by the State Council Information Office on last Tuesday. The average reduction in mortgage rates for existing home loans is expected to be around 0.5 percentage points. The minimum down payment ratio for both first and second homes will be unified, with the nationwide minimum down payment ratio for second homes to be reduced from 25 percent to 15 percent, Pan said. This move is expected to boost China’s real estate market.

I. Direct impacts of Policy Rate Cuts

1. Reducing Mortgage Rates: The reduction of the policy rate will guide the loan prime rate (LPR) and deposit rate to move downward simultaneously. Mortgage rates would also be lowered, which is conducive to easing homebuyers’ economic burden and enhancing their purchasing power.

2. Stimulating Housing Demand: Mortgage rate cuts will stimulate the purchasing willingness of homebuyers, especially for those with rigid and improvement-oriented housing demand. A lower interest rate environment will help reduce their housing costs, thereby attracting more buyers to the housing market.

II. Improvement Expectations for Real Estate Market

1. Increased Transaction Volume: With the reduction in mortgage rates, it is expected that China’s real estate transaction volume will increase in the fourth quarter of 2024. The decrease in housing costs will encourage more potential buyers to convert into actual buyers, thus driving the growth in transaction volume.

2. Enhanced Market Confidence: The downward adjustment of policy rates signals the government’s efforts to stabilize the real estate market, which helps boost market confidence. Enhanced market confidence will further boost housing demand, creating a virtuous cycle.

3. Intensified Regional Disparities: Despite the overall positive market outlook, disparities in different regions will persist. First-tier cities and second-tier core cities may exhibit stronger growth momentum due to favorable policies and increased supply of high-quality land. Some third and fourth-tier cities may still need more time to absorb inventory pressures.

4. Improved Financing Environment for Real Estate Developers: The reduction in policy rates is not only beneficial to homebuyers but also to real estate developers. Lower financing costs will reduce financial pressure on businesses, enabling them to increase investment and accelerate construction. This will further stimulate the vitality and transaction volume growth in the real estate market.

III. Support from Other Related Policies

1. Reduced Mortgage Rates for Existing Home Loans: China has also announced measures to guide banks to lower mortgage rates for existing home loans to a level similar to those of newly issued housing loans, with an expected average reduction of around 0.5 percentage points. This new policy will directly reduce borrowers’ mortgage interest expenses, stabilize market expectations, and will potentially boost consumption and investment.

2. Unified Minimum Down Payment Ratio for First and Second Homes: The minimum down payment ratio for both first and second homes will be unified, with the nationwide minimum down payment ratio for second homes to be reduced from 25 percent to 15 percent. This adjustment will lower the threshold for home purchases, especially benefiting groups with improvement-oriented housing demand.

In summary, following the announcement of a 20 basis points reduction in the policy rate by the central bank, it’s expected that mortgage rates in China will also be adjusted downwards, positively impacting on China’s real estate market in the fourth quarter of 2024. With reduced housing costs and enhanced market confidence, it is anticipated that real estate transaction volume will increase. Moreover, intensified regional disparities and improved financing environment for real estate developers are expected to further stimulate the vitality and transaction volume growth in Chinese real estate market.