China's interest rate reform won't stoke real estate market

China's new interest rate reform aiming to steer business funding costs lower will not stoke the real estate market, analysts said.

The country's central bank announced Aug 25 that starting from Oct 8, new mortgages will be priced based on latest month's loan prime rate (LPR) of the corresponding term, while certain basis points will be added.

New mortgage rates for first-home purchases should not be lower than the related LPRs, while those for second-time buyers should be at least 60 basis points higher than the LPRs, according to the People's Bank of China (PBOC).

This came after the central bank announced a plan to reform the LPR mechanism to better reflect market changes.

Under the revamped mechanism, the LPRs, released on the 20th day of every month, are based on rates of the central bank's open market operations, especially the medium-term lending facility rates. Banks are required to set rates for new loans using the new LPRs as the benchmark.

The policies will help guide funding costs of businesses lower without stoking the property market, in line with the government's pledge of not using real estate as a short-term means to stimulate economic growth, said E Yongjian, an analyst with the Bank of Communications.

PBOC deputy governor Liu Guoqiang said last week the real lending rate for housing mortgages would not fall, as the goal of the LPR reform is to channel more funds to the real economy.

The first new one-year LPR, released last week, stood at 4.25 percent, 10 basis points lower than the central bank benchmark lending rate, while the above-five-year LPR was 4.85 percent, slightly lower than the 4.9-percent central bank benchmark rate.

According to policies announced on Aug 25, after adjustment, the mortgage rate floor for the country's second-home buyers would be 5.45 percent based on the latest LPR, basically equivalent to the current level.

In an attempt to control mortgage rates, the PBOC said Aug 25 that local lenders would be guided to set lower limits on mortgage rates based on property policies applied in different regions.

The move will make mortgage rates differ among regions and borrowers, said Zhou Jingtong, a researcher at the Bank of China Institute of International Finance.

The country's property market has remained stable as the government maintains tighter regulations, including curbing home purchases and stricter mortgage policies.