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Real Estate Loosening Policies Have Significant Impact on Bank Operations and Investment Strategies

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Title: New Measures Aim to Boost Real Estate Market and Impact Bank Operations

Date: August 31, 2023

On August 31, the relevant departments issued two notices aimed at reducing interest rates on existing first home loans and optimizing housing credit policies. These measures are part of a continuing effort to stimulate the real estate market and are expected to have significant implications for banks and their investment strategies.

The notice on reducing interest rates for existing first home loans expands the scope of influence of the “recognize a house but not a loan” policy. Starting from September 25, 2023, existing first home loan interest rates can be changed either by borrowing new loans to repay old ones or by directly agreeing to a rate reduction. These changes apply to two categories of loans: first, first-home loans issued before August 31, 2023, and first-home loans with signed contracts but not yet issued; second, mortgages for properties that meet the standards for first-home housing in the borrower’s city. As more cities adopt the “recognize the house but not the loan” policy, the reduced interest rate for second home loans will also be applicable when taking out the loan. If the second home is subsequently sold and the borrower currently has only one home loan, the interest rate can also be reduced.

Based on calculations, the reduction in existing first home loan interest rates may range from 45 to 95 basis points, with an average reduction of 65 basis points. The reduction is expected to affect approximately 12.26 trillion yuan ($1.9 trillion) in outstanding mortgage loans, resulting in an annual reduction of 79.7 billion yuan ($12.4 billion) in interest income for banks. This will decrease the bank’s net interest margin by approximately 3.38 basis points. As a result, banks’ net interest margins may decline to around 1.7% after the full implementation of the interest rate reduction.

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The second notice focuses on optimizing differentiated housing credit policies. It stipulates that the down payment ratio for first homes should be no less than 20% and for second homes, no less than 30%. Additionally, the lower limit for second home loan interest rates is adjusted from LPR+60 basis points to LPR+20 basis points, reducing the additional points by 40 basis points. However, the specific implementation of these policies will depend on city-specific regulations.

It is predicted that the impact of these measures will primarily be felt in high-energy cities such as Shanghai and Beijing, where there is greater demand for housing. In contrast, the impact on low-energy cities may be limited due to the relaxation of real estate policies and the independent determination of interest rate lower limits by some cities. The extent of the impact will also depend on the degree of policy relaxation implemented locally.

Despite these measures to stimulate the real estate market, it is expected that the strength of the current real estate recovery cycle may be weak. The focus of policy relaxation is likely to be on mitigating risks in the real estate industry while supporting economic growth targets. This may include avoiding the addition of new risk-taking real estate companies and implementing support measures for private real estate enterprises.

The new measures are expected to have implications for bank investment strategies, particularly in the bond market. Banks will need to consider the impact of reduced interest rates on their net interest margins and explore alternative investment options.

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In conclusion, these new policies aim to boost the real estate market but may have significant consequences for banks and their investment strategies. The impact of these measures will be primarily observed in high-energy cities, while low-energy cities may see limited effects. The strength of the real estate recovery cycle is expected to be modest, with a focus on risk mitigation and economic growth targets. Banks will need to analyze the implications of these measures and adjust their investment strategies accordingly.

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