Chinese Cities to Ease Policies as Home Buyers' Leverage Ratio Hits 10-Year Low
Ma Yifan
DATE:  Aug 17 2022
/ SOURCE:  Yicai
Chinese Cities to Ease Policies as Home Buyers' Leverage Ratio Hits 10-Year Low Chinese Cities to Ease Policies as Home Buyers' Leverage Ratio Hits 10-Year Low

(Yicai Global) Aug. 17 -- Chinese governments are expected to relax their house purchasing policies as residents are choosing to repay their mortgages early amid the economic slowdown.

In the second quarter, the nationwide home purchasers' leverage ratio fell to 21.2 percent, a 10-year low, down by more than half from a record high of 44.6 percent in the fourth quarter of 2016, according to statistics provided by the E-House China Research and Development Institute.

China must stay alert to the phenomenon of repaying home loans ahead of schedule, said Yan Yuejin, research director of a think tank under the real estate data provider. Mortgage policies are expected to be eased nationwide, Yan added.

"I repaid CNY1.2 million (USD176,780) of mortgage ahead of schedule last year and CNY150,000 (USD22,097) recently,” a manager at a foreign company in Shanghai told Yicai Global. Currently, the balance is less than CNY1 million.

The manager said one of the major reasons for him to repay quickly is the low-interest rate environment. He bought his second house at an annual rate of over 5 percent in 2019. There hardly are any low-risk investment products with an annual rate higher than 5 percent so it makes sense to repay the loan early. 

Residents are wary of debt. New mid to long-term yuan-denominated loans tallied CNY148.6 billion (USD21.9 billion) last month, down by 63 percent from a year ago and even more from June, according to data released by the central bank last week.

Residents' housing loan balance was CNY38.86 trillion (USD5.72 trillion) as of June 30, up 6.2 percent from a year ago, based on data from the People's Bank of China. The growth rate was the slowest in the past 13 years. It was also 5.1 percentage points lower than that of Dec. 31, 2021.

Local governments of many cities are formulating policies to return to earlier levels of leverage.

Several cities have reduced the minimum down payments for first-time buyers to 20 percent of the full price in the first half. Developed cities, such as Nanjing, Suzhou, Wuxi, and Jinan, have also recently revealed cuts to such rates for purchasers of second homes.

For example, eastern China's Nanjing said on Aug. 12 that it will decrease the percentage of down payments for second-time buyers to 60 percent from 80 percent. Those who have already repaid their first mortgages can enjoy a rate of 30 percent.

Market data support early repayments. Interest rates for first-time home buyers were 4.35 percent on average in 103 key cities, based on data that the Ke Research Institute released last month. Meanwhile, the rate for second homes was 5.07 percent on average. In comparison, the current five-year deposit rate is only around 3 percent at major commercial banks.

A 30-year-old white-collar worker told Yicai Global that he is planning to buy a house worth around CNY10 million (USD1.5 million). He was first intending to secure a down payment of 30 percent of the value but changed his mind to 60 percent. He is planning to borrow the extra money from his parents.

"I have changed my risk preference seeing what happened to my friends -- some lost jobs and others got a pay cut -- as well as information from the social media,” the above-mentioned source said. "One popular opinion on social media is that the best investment strategy at the present is to repay your home loan ahead of schedule," he said, adding that when the macroeconomic environment changes, it is better to cut one’s debt burden.

Editors: Tang Shihua, Emmi Laine, Xiao Yi

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Keywords:   Early Payment,Down Payment Proportion,Deleverage Process,Mortgage Payment,Property Developer,Bank,Government Policy,Industry Analysis