Guangzhou last major Chinese city to relax mortgage rules

Guangzhou this week became the last among the four tier-1 cities to relax mortgage rules for borrowings from the government-subsidised housing provident fund to stimulate property demand at a time when commercial banks' ability to lend cheaper loans is crimped by interest rate liberalisation which has squeezed profit margins.

The mainland's third-largest city in terms of gross domestic product (GDP) after Shanghai and Beijing lowered downpayments to 20 per cent from the previous 30 per cent for first-time home buyers of flats larger than 90 square metres but smaller than 144 square metres. The new rules became effective on Monday.

"This is definitely good news for those planning to buy medium- and big-sized flats," said local real estate agency Hopefluent Property.

The deposit for those buying their second homes was lowered to 30 per cent or 40 per cent - from the previous 60 per cent - depending on whether they are still servicing the mortgage loan on their first flats.

Guangzhou followed three other tier-1 cities - Beijing last month, Shanghai and Shenzhen in April - and dozens of smaller cities to make it easier for home buyers to borrow more from the local governments' housing provident funds.

After two interest rate cuts this year, loans above five years from the housing provident funds are now priced at 3.75 per cent per annum, while those of the same tenor from commercial banks cost 5.65 per cent per annum.

Due to a property market correction, Guangzhou last year extended 18.9 billion yuan (HK$23.9 billion) in mortgage loans from its housing provident fund, 40 per cent less than in 2013.

The latest rule kept the maximum borrowing at 500,000 yuan for an individual and 800,000 yuan for a couple, but made it available to all who have been contributing to the fund for six consecutive months.

Such changes in local rules are broadly in line with relaxation by central authorities to support a recovery in the real estate market that weakened early last year amid a glut. Chinese cities need a vibrant property market to drive local economies and pump up fiscal revenues. Some small cities are even offering cash subsidies to prop up the housing market.

On the other hand, commercial lenders are discounting central bank instructions for cheaper mortgage loans to improve housing affordability. Data from financial product search engine Rong360 showed all 23 banks it tracked in Guangzhou have kept downpayments at 70 per cent for second home buyers, instead of 40 per cent encouraged by the People's Bank of China.

The average discount on mortgage rates for first-time home buyers is now 6 per cent in Guangzhou, a far cry from up to 30 per cent allowed by the central bank.

Rong360 said any discount bigger than 10 per cent on mortgage loans would be unprofitable for mainland Chinese banks whose profit margins have been squeezed by the country's push to liberalise interest rates and as competition from other lending platforms pushes up the cost of deposits.

"Given the overly quick recovery of the housing market, the city government and local banking regulator will make conservative changes to policies with the launching date still hard to predict," said Rong360 analyst Yuan Yuan.