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Signs of higher mortgage rates

(People's Daily)

16:47, October 18, 2011

Edited and Translated by People's Daily Online

The news that China Construction Bank will raise mortgage rates for first-time homebuyers in Beijing has immediately drawn great public attention. The reporter has fact-checked the news and investigated the meaning of the bank's move.

Banks' risk awareness enhanced

A staff member of the loan department of China Construction Bank's Beijing branch said that in most cases, the bank charges interest rates on individual loans higher than the central bank's benchmark lending rate. At present, the mortgage rates for first homes are 1.05 times the benchmark rate.

A relevant official from the bank's Beijing branch said that the branch charges differential mortgage rates based on the specific conditions of different clients because the head office has issued a notice saying, "China Construction Bank has paid close attention to the changes in the housing market and decided to continue to adopt differentiated policies for mortgage rates after studying the practices of other banks and considering the potential risks associated with individual loans."

Industrial and Commercial Bank of China (ICBC), Bank of China, and Bank of Communications have so far refrained from raising rates on mortgage loans. However, according to information from an ICBC sub-branch in Beijing's Haidian district, the bank also adjusts the mortgage rates for different homebuyers, although it still sticks with the benchmark-lending rate for first-time homebuyers.

Zhu Xiaohuang, vice president of China Construction Bank, said earlier in an interview that given the current tight monetary policy, banks are under pressure to allocate their credit resources and China Construction Bank will not scale back on mortgage lending. "Currently, the demand for mortgage lending is still huge, banks tend to use means such as interest rates to adjust supply and demand," he said.

Further affecting balance of housing supply, demand

“Raising mortgage interest rates will likely dampen the demand of some potential house buyers and accordingly affect the real estate sector,” said Guo Tianyong, director of the Banking Research Center under Central University of Finance and Economics.

Beijing Centaline Property Agency theorized that following the mortgage interest rate hike by banks, the monthly payment of a 20-year 1-million-yuan mortgage for first-time homebuyers will approach 8,000 yuan for the first time, with an increase of 50,000 yuan in the total interests to be paid. This will have almost the same impact on the housing market as interest rate hikes by the central bank because first house buyers will have to bear more burdens and potential buyers with rigid demand will considerably be discouraged.

Yin Zhongli, a senior researcher with the financial research institution of the Chinese Academy of Social Sciences, said, “The mortgage interest rate for the first-time homebuyers has changed from a discount of 30 percent to zero discount and to the current 105 percent of the benchmark interest rates, marking that the interest costs have been up by 30 to 40 percent. This will likely pose a considerable impact on the purchasing power on the housing market.” However, whether or not other banks will follow the lead of China Construction Bank will depend on the reactions of the housing market and the authorities.

The People's Bank of China declared on Oct. 14 that the total of new RMB loans for September was 470 billion yuan, which had decreased by about 131 billion yuan compared to that of the same period of 2010. The mobility is a general environment for the real estate market. Analysts said that the number of new loans in September 2011 had decreased obviously and set a new low record for the past 21 months, indicating that the effect of the policies is still relatively tight.

Yin believes that the high transition volume of the real estate market was mainly caused by the speculation, and from the obvious decline of the transition volume after the property-purchasing limitation and loan limitation policies were launched, it could be seen that the speculation force was very severe but is being pushed out of the market, and the turning point of the real estate market is taking shape. In Yin's opinion, according to the effectiveness of the real estate policies of Beijing and some other places, the housing prices are expected to return to reasonable levels.

But analysts also remind that it could be seen from the housing price trend of 2009 that once the effective policies, such as the property-purchasing limitation and loan limitations are cancelled, the market expectations may change.

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