China’s homeowners rush to pay off mortgages early as economic outlook dims

Li Wen, an HR director at a state-owned enterprise in Nanchang, Jiangxi province, paid off 200,000 yuan ($28,170) of her home loan early in January, shortly after receiving her annual bonus at service.

The 36-year-old has been prepaying her loans, totaling 600,000 yuan, in recent years, even after the interest rate was reduced to 4.3 percent from the original 5.39 percent after several rounds of interest reductions since the last date. year.

“Depositing money in banks does nothing for me,” Li said. “Deposit rates are much lower and we don’t have ideal high-yield investment options.”

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“I prefer to pay off my loans early to save on interest, especially when pay cuts and job cuts become common.”

Li’s concerns are shared by many homeowners in China, who had bought homes in a hot market with high hopes for appreciation before prices began to fall.

A construction site in Beijing. Photo: Agence France-Presse alt=A construction site in Beijing. Photo: Agence France-Presse>

China’s real estate market, once a major pillar of the national economy, has been in crisis since August 2020, when the government implemented a policy called the “three red lines” aimed at curbing excessive borrowing by property developers.

Since then, some owners, suffering from heavy loan burdens and an uncertain economic outlook, have sold their homes. Others, like Li, saved and took advantage of the interest rate cuts to pay off mortgages or home loans.

This year, the People’s Bank of China cut the five-year base lending rate, which commercial banks use as a benchmark to adjust their mortgage rates, by a total of 35 basis points to 3, 85% The central bank also raised the floor for mortgages on new and second-hand homes nationwide.

This prompted dozens of Chinese cities to cut their mortgage rates to 3.2% and others below 3%. The average rate for newly issued mortgages was 3.45 percent in June, down from 4.27 percent last September, according to government data.

The owners jumped at the chance.

Each month last year, an average of 450 billion yuan of mortgages were paid off prematurely, according to data compiled by Australia and New Zealand Banking Group (ANZ). That number rose to 600 billion yuan in the first seven months of this year, equivalent to 15 percent of China’s retail sales or 12 percent of the population’s disposable income over the period.

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Residential buildings in Beijing. Photo: Bloomberg alt=Residential buildings in Beijing. Photo: Bloomberg>

Outstanding mortgage loans in China fell to 37.79 trillion yuan at the end of June, the lowest level in nearly three years, official data showed.

Amid calls to narrow the gap between existing and new mortgages, China could cut rates on outstanding mortgages by up to 50 basis points as early as this month, bringing the total cut to 80 basis points. basis until next year, according to a recent study. report from Bloomberg, citing anonymous sources.

The upcoming relief measures have raised the hopes of some landlords. “Once it is implemented, I will relax my budget and withdraw my mortgage prepayment request,” wrote one user on Xiaohongshu, a Chinese social media platform similar to Instagram, also known as Red.

“A further reduction in the outstanding mortgage rate will lower costs for existing homeowners and boost consumption and investment,” said Chen Wenjing, director of market research at China Index Academy. “It will also ease the sense of wait-and-see extended by expectations of further rate cuts and support consumption, including home buying.”

But while such measures may bring a short-term rebound in consumption, in the long term they may not stimulate the housing market, according to some analysts.

“Should this mortgage rate cut materialize, we believe the potential impact would be quite limited in stimulating demand in China’s housing market,” said Ricky Tsang, director at S&P Global Ratings.

“The loan burden on existing homeowners may be reduced with a rate cut, (but) property demand is still constrained by the weakening economy and falling house prices,” he said.

A construction project under construction in Beijing. Photo: EPA-EFE alt=A construction project under construction in Beijing. Photo: EPA-EFE>

While an 80 basis point cut is “broadly in line” with expectations, said Xing Zhaopeng, a senior China strategist at ANZ, “the effect may be limited”.

“It might help lower mortgage prepayments, but it’s not enough to get the housing market back to normal,” he said, citing low rental yields across the country — about 3 percent in major second- and third-tier cities and about 2% in first-tier cities – as one of the major obstacles to purchasing housing.

Buyers also remain wary of falling home prices.

China’s new home prices fell by the most in nine years last month, falling 5.7 percent from a year earlier, according to official data released on Saturday. Meanwhile, contract sales generated by China’s top 100 developers fell 10 percent in August from a month earlier and 27 percent from a year earlier, according to the China Real Estate Information Corporation.

“Unless there is a major stimulus to reverse house price expectations and lift rental yields above mortgage rates, China’s property may remain uninvestable,” ANZ’s Xing said.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP Facebook and Twitter pages. Copyright © 2024 South China Morning Post Publishers Ltd. All rights reserved.

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