China Mortgage Discounts to Reappear in Shanghai in August

China’s state-owned banks are wasting little time in implementing the government’s decision to loosen up mortgage credit, as the Agricultural Bank of China announced last week that it would begin offering discounts on home loans starting next month.

According to a story from official news agency Xinhua, the bank – which is among China’s four largest – will begin offering a 5 percent discount on interest rates to clients borrowing at least RMB 2 million for first home purchases in Shanghai.

Encouraging More Mortgage Borrowing

The offering of the mortgage incentive by a large bank in one of China’s healthiest housing markets can be seen as a confirmation of the government’s decision to implement a “mini-stimulus” to prop up the country’s sliding real estate market.

According to official statistics released earlier this month, home prices fell in 55 out of China’s 70 largest cities during June, following moves by the government last year to cool down housing price inflation. Now, one of the strongest tools used to tamp down the market – the removal of mortgage discounts for first-time buyers is rapidly being reversed.

So far, the Agricultural Bank is the only major financial institution to reintroduce mortgage discounts in Shanghai, however, in a poll by Bloomberg earlier this month 74 percent of analysts expected discounted mortgage rates to be reinstated during the second-half of this year, now that home prices have started to head down. A majority of the analysts – 56 percent – also predicted that downpayment restrictions would be removed as a further stimulant to flagging home sales.

Discounts Quickly Reinstated

Most of China’s banks ended preferential mortgage rates late last year under direction from the central government. By February of this year commercial banks in China were charging customers, whether first time buyers or not, at least the full benchmark mortgage rates, with some lenders, such as the Bank of East Asia, lending to potential homeowners at a 20 percent premium over the benchmark rates.

Before the reversal of policy last year, China Construction Bank, which is the country’s largest mortgage lender had been offering discounts of 15 percent off of the benchmark mortgage rates for first time borrowers.

Mortgage Backed Debt Products Also Reappear

Besides the lower mortgage rates for first time buyers, China’s government has taken further steps to encourage mortgage lending. Earlier this month the state-owned Postal Savings Bank of China announced the first mortgage-backed debt product in China since 2007.

The mortgage-backed products had disappeared in China after they had helped to create a financial meltdown in the US. Now, however, they maybe offering the government the opportunity to add more liquidity to bank balance sheets, particularly in the area of loans for home purchases.

24 Percent of Analysts Unable to See Two Weeks Ahead

An interesting sidelight to the return of mortgage discounts so soon after their possible reintroduction was predicted by many analysts in the Bloomberg poll. In the poll, which was conducted the week of July 14th, although 76 percent of the respondents foresaw the return of discounted mortgages, the remaining 24 percent seem not to have anticipated the move which has already arrive less than two weeks later.