(Yicai) March 22 -- Even though two Chinese cities recently hiked the minimum interest rate on mortgages for first-time home buyers, the overall trend is still down, according to an expert.

More banks will likely offer the lower limit to most borrowers because of sluggish demand for housing, said Dong Ximiao, chief researcher at CMB-China Unicom Consumption Finance.

China introduced the dynamic adjustment mechanism in January last year. It allows local governments to lower or remove the floor on mortgage rates if the selling prices of new homes fall month on month and year on year for three months in a row.

The cities of Shijiazhuang and Huizhou recently raised their floors. Analysts noted that house prices in Shijiazhuang, the capital of Hubei province, had risen for three straight months, while mortgage rates were relatively low in Huizhou, leading to their dynamic adjustment.

China has a 'three-tiered' pricing mechanism for mortgage rates. The central bank, the People’s Bank of China, sets the lower limit on mortgage rates, local governments then set the minimum rate according to the national level, and banks decide the actual rates with borrowers.

The PBOC cut the five-year loan prime rate, used by many lenders as a mortgage reference rate, for the first time in nearly six months on Feb. 20, lowering it by a record 25 basis points amid efforts to bolster the property sector. Considering the impact of prices on banks’ business and net interest margins, lenders will be strongly motivated to hike mortgage rates, according to analysts.

Shijiazhuang’s rate floor will rise by 30 bips to 3.45 percent on April 1, Yicai confirmed with local banks. Some lenders in Huizhou have increased theirs by 15 bips to 3.6 percent since March 1. 

Cities that meet the conditions of the dynamic adjustment mechanism must make real-time changes, helping local authorities and financial institutions make adjustments according to market conditions, Dong said, noting that this will also promote the sound growth of the real estate market.

Housing credit policies should be further relaxed to make it easier for residents to buy homes and boost their willingness and capacity to spend, Dong added.

Editor: Martin Kadiev