The central bank lowered the lower limit of interest rates for first homes, releasing a warming signal for steady growth. From the perspective of actual direct interest savings and historical review, the policy is strong and has significant signal significance, but under the impact of the current epidemic and under the background of no reversal of real estate expectations, the specific effect of the policy still needs to be observed. the rebound in real estate fundamentals may be longer than previous wheels. The benign result of this year's real estate policy is to "hold the bottom", there is no further risk after a smooth bottom, and the real fundamental rebound still needs the policy to continue to make efforts.

We have been emphasizing since March that there are two waves of steady growth and three axes-infrastructure, real estate and platform economy-and the second wave of warming is in the second quarter. The central bank today adjusted its differentiated housing credit policy, cutting interest rates on first-home loans at the national level for the first time since 2016, a further sign that steady growth is under way. Specifically, the adjustment changes the lower limit of interest rates for the first suite to LPR minus 20 basis points, or 4.4%, and the second home is still LPR+60BP, that is, 5.2%. On the basis of this country, the lower limit of the "policy for the city" in each region is determined.

Our comments are as follows:

1. This policy aims to further reduce the purchase cost of first suite residents, stimulate rigid demand for housing, and stabilize the follow-up medium-and long-term credit expansion of residents.

At present, the pricing of mortgage interest rates follows the three levels of "national-regional-bank". First, there is a lower limit that should be observed at the national level, such as the LPR minus 20 basis points this time. Secondly, the branches of the central bank guide the provincial market interest rate pricing self-regulatory mechanism to determine the lower limit to be observed in each city area. Finally, banks set their own prices, and most of them basically directly adopt the national lower limit without additional points.

Since the beginning of this year, local mortgage interest rate cuts have mainly occurred at the bank and regional level, the overall effect is lacklustre, still need to continue to cut. In terms of room for further reduction, according to Shell net data, the current mainstream average interest rate for second homes is 5.6%, which is still 40BP distance from the lower limit of 5.2% set by the central bank, but most of the first suites are in line with LPR, and the further reduction is subject to the current 4.6% LPR constraints. This lower limit reduction will help local banks to open room for subsequent mortgage interest rate cuts. Social finance credit halved in April, among which the negative growth of residential loans was the most serious in history, of which the negative growth of mortgage loans accounted for nearly 60%. At present, it is very important to stabilize resident credit.

2. Compared with the historical stimulus, this adjustment is still under the framework of "housing speculation" and "policy due to the city". Compared with the stimulus policy before 2016, it is weaker than that before 2016, but it belongs to the higher intensity of the previous real estate relaxation cycle since 2016.

Before 2016, the relaxation of real estate showed a pattern dominated by the national level and supplemented by local governments. For example, in October 2008, the lower limit of the housing loan interest rate was reduced from 0.85 times to 0.7 times, and the provident fund loan interest rate was correspondingly reduced by 0.27%. At that time, the benchmark interest rate for five-year loans was 6.12%, 0.7 times and 4.28%. In June 2012, the lending rate of housing provident fund was cut by 0.2 percentage points at the national level, and the first suite was offered a 30% discount in some areas. "two-way regulation" was proposed in 2014, and the 930 New deal lowered the loan interest rate at the national level to 0.7 times the benchmark interest rate.

At that time, the benchmark interest rate for five-year loans was 6.15%, 0.7 times and 4.3%. After 2016, only some regional banks, such as Shenzhen, cut the interest rate on first-home loans from 15% to 10% in December 2018. Since then, mortgage interest rate concessions have been concentrated at the regional and bank levels. Thus it can be seen that compared with before 2016, the current policy is still moderate, but compared with the history after the "policy for the city" was put forward in 2016, the current policy has shown a clear positive signal.

3. Direct influenceAfter this reduction, for 3 million housing loans, 20 years of equal principal and interest repayment can save 324 yuan per month, and 20 years can reduce interest by 78000 yuan. By contrast, the same amount of loans can save 85 yuan per month after the 5-year LPR decreases 5BP in January 2022, and reduce interest by 20400 yuan for 20 years. The effect of the lower limit on mortgage interest rates is equivalent to a direct cut in 20BP by the 5-year LPR.

Thus, from the direct effect of the policy, the effect of this reduction is also stronger, and more accurate, differential adjustment, only for the first suite, reflecting the policy's current position of strongly supporting rigid demand.

4. the effect on real estate sales and wide credit still depends on the follow-up intensity of the policy and the state of economic operation. According to historical experience, it will be effective in as short as one quarter and as long as two quarters. However, under the impact of the current epidemic and against the background of no reversal of real estate expectations, the specific effect of the policy still needs to be observed, and the rebound in real estate fundamentals may take longer than previous wheels. The benign result of this year's real estate policy is to "hold the bottom", there is no further risk after a smooth bottom, and the real fundamental rebound still needs the policy to continue to make efforts.

Looking back at history, after the interest rate cut in October 2008, real estate sales and residents' medium-and long-term loans continued to decline in the fourth quarter, but achieved a "good start" in early 2009, with a policy transmission lag of about 1 quarter. Due to the relatively stable fundamentals in 2012, real estate sales, investment, prices and medium-and long-term loans all rebounded steadily in June after the interest rate adjustment.

After the 930 New deal in 2014, due to weak fundamentals and the particularity of high real estate inventory, sales, investment, prices and residents' medium-and long-term loans all began to pick up after the first quarter of 2015, when there was a lag of about two quarters, and the real estate relaxation policy continued to be introduced during that period. Due to the weak degree of real estate relaxation in 2018, but the fundamentals recovered somewhat in the pull of the previous infrastructure, sales, prices and medium-and long-term loans all picked up in 2019 Q1, and the policy lag was about one quarter.

5. Looking back, is there still room for reduction in the follow-up LPR?Although this cut is equivalent to a direct cut in the interest rate of the 5-year LPR for the first home mortgage, we still believe that there is a possibility of a reduction in both the 1-year and 5-year LPR in May. 5-year LPR is not only related to housing loans, but also related to medium-and long-term supporting loans for manufacturing and infrastructure.

In April, the impact of the epidemic on credit reached 60%. Whether it is to bail out enterprises, support the manufacturing industry, or cooperate with the financial follow-up of loans, the decline in financing costs of the whole society also needs further adjustment by LPR. In terms of real estate, in addition to interest rate adjustment, there are a series of incremental policies to be expected, such as adjusting the identification standards of the first suite, reducing transaction taxes and fees, reducing the down payment ratio, and so on.