In a bid to revitalize the struggling property market and bolster the overall economy, China has implemented its biggest-ever reduction to a key mortgage rate. This move comes amidst a deepening crisis in the sector, marked by declining sales and financing challenges.
The five-year Loan Prime Rate (LPR), a benchmark for banks’ set by the People’s Bank of China, has been slashed from 4.2% to 3.95%. This represents the largest decrease since the LPR system was introduced in 2019, showcasing the urgency of the situation.
The aim of this cut is twofold: reduce household mortgage burdens and incentivize home purchases. This could potentially inject much-needed cash flow into the property market and stimulate investment. China’s housing mortgage loans, as of December 2023, totaled a staggering 38.2 trillion yuan (US$5.3 trillion).
While the one-year LPR, reflecting market lending rates, remains unchanged at 3.45%, this step signifies a decisive intervention by the central bank. It follows a series of recent measures, including the establishment of an urban real estate financing coordination mechanism in over 100 cities. This mechanism facilitates collaboration between local governments and housing departments to alleviate financing hurdles for real estate projects.
The need for intervention is stark. Sales figures paint a worrisome picture:
Commercial housing sales area witnessed an 8.5% decline in 2023 compared to the previous year. Residential sales area suffered a similar 8.2% drop.
Sales revenue for commercial housing fell by 6.5% to 11.66 trillion yuan, while residential sales revenue decreased by 6%.
This bold rate cut signifies the Chinese government’s determination to reverse the trajectory of the property market and its impact on the broader economy. Whether it will be enough to reignite the sector remains to be seen, but it represents a significant step in that direction.
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