Source: Zhongjin Dim Sum
Authors: Li Hao, Zhang Yu, Lin Yingqi, Xu Hongming, Zhou Jiming, Zhang Shuaishuai, Yan Jiahui, Lu Jiaoyang

On August 31, 2023, the People's Bank of China and the State Administration of Financial Supervision and Administration issued the “Notice on Adjusting and Optimizing Differential Housing Credit Policies” and the “Notice on Matters Relating to Lowering Interest Rates on First Home Loans in Stock”, which clearly optimized the down payment ratio and interest rate requirements for new and stock loans. This article will be interpreted from a real estate and banking perspective.

Real estate: The down payment ratio and lower interest rate limits have been adjusted, and fundamental recovery can be expected

The current policy's adjustments to the minimum down payment ratio and the lower interest rate limit for newly issued mortgages have exceeded expectations, and may effectively drive sales recovery.In terms of the minimum down payment ratio, the previous policy required cities with restricted purchases to implement the 30% standard for the first set/ 40% for the second set, and non-restricted cities to implement the 20% standard for the first set/ 30% for the second set. This time, it has been adjusted uniformly to the new standard of 20% for the first set/ 30% for the second set. According to our statistics, using ordinary housing as the standard calculation, there is still room for 24 out of 32 ultra-high/high-energy cities to be lowered to varying degrees compared to the new lower limit of the down payment ratio determined this time. Specifically, the average downpayment ratio reduction space for the first set/second set in the 3 ultra-high energy cities (North and Shenzhen) is 13 and 30 percentage points respectively. The average reduction space for the first set/two sets corresponding to 21 high-energy cities is 10 and 15 percentage points respectively; in the end, the actual implementation of the down payment ratio for each city still follows the “in-city policy” framework and can be adjusted independently. In terms of the lower interest rate limit for newly issued mortgages, the current policy continues with the lower interest rate limit for the first home loan being LPR for the same period minus 20 basis points, but the lower interest rate limit for the second home loan was lowered from LPR for the same period plus 60 basis points to LPR plus 20 basis points for the same period. We believe that the strength of this policy has exceeded the market's previous expectations. Combined with the implementation of “no loan approval” in Guangzhou, Shenzhen, Wuhan and other places, it will effectively lower residents' purchase thresholds and costs and promote the release of potential reasonable demand for home purchases. At the same time, it will also have a positive guiding effect on market expectations, and jointly drive a steady recovery in future market sales. Currently, China's Tier 1 and 2 cities account for more than 30% of the sales area and more than 50% of the amount. We believe that a significant percentage of these cities may have positive sales performance after this round of policy adjustments. In August, the sales area and amount of the top 100 housing enterprises dropped slightly by 3.6% and 0.9%, respectively, from month to month, and is beginning to build a trend of bottoming out. Furthermore, this policy also allows interest rates on stock first home loans to be lowered. According to estimates by the China Finance Bank Group, this may drive the average interest rate on stock loans down 50 basis points to 4.2%. Although this policy does not directly encourage residents to buy new homes, it can indirectly promote the formation of residents' housing purchase decisions in the medium term by increasing savings in residents' mortgage expenses and increasing the prosperity of social and economic activity.

Actively prompt the real estate and property sector to allocate value.Recently, there have been frequent real estate policies, including but not limited to the Securities Regulatory Commission, which allows housing enterprises to refinance without being restricted by breakdowns, breakdowns, and losses; the extension of the improved tax refund policy for home purchases; the implementation of “approval of housing and no loan approval” in key cities; current adjustments in down payment ratios and interest rate limits; looking ahead, we think cities will follow suit and make comprehensive optimization and adjustments to loan restriction policies, leading to a marked recovery in the real market boom. Considering that the current positions and valuations of A/H real estate stocks are still low, we actively suggest the allocation value of the real estate sector. We recommend: 1) an opportunity for high-quality central state-owned enterprises (or state-owned enterprise qualifications) in cities with heavy land storage and high energy levels to add icing on the cake; 2) flexible opportunities for high-quality non-state-owned enterprises to consolidate their finances and return to steady development. At the same time, the property management sector may also gradually begin valuation repairs. Steady property companies are expected to obtain relative benefits with the support of their own performance growth rate and degree of fulfillment.

risks

The progress of policy implementation and fundamental repairs fell short of expectations; the credit of housing enterprises deteriorated at an accelerated pace.

Chart 1: Current statistics on purchase restriction policies in 32 ultra-high/high-energy cities

Note: 1) The data period ends on August 31; 2) The social security/personal tax for outsiders is 0, which means that outsiders can buy a house in the restricted purchase area without providing social security or personal tax proof.

Chart 2: Current statistics on loan restriction policies in 32 ultra-high/high-energy cities

Note: 1) The data period ends on August 31; 2) Light yellow indicates that there is no room for further reduction in the down payment ratio, and light green indicates that it can still be lowered.

Chart 3: In August, mainstream interest rates for the first and second home loans in Baicheng were the same at 3.90% and 4.81%, compared to the 5-year LPR deduction point of 30BP and 61 BP, respectively. Among them, the average interest rate for the first home loan in first-tier and second-tier cities was 4.50% and 3.88%, respectively

Chart 4: The sales area of the top 100 real estate companies fell 3.6% month-on-month and 41% year-on-year in August

Chart 5: Sales of the top 100 real estate companies fell 0.9% month-on-month and 38% year-on-year in August

Chart 6: The weekly high-frequency data of the Central Index shows that the sales area of new homes in the 57 sample cities increased 14% month-on-month and decreased by 24% year-on-year in the 57 sample cities last week

Chart 7: Historical NAV discount levels and dynamic price-earnings ratios of A-share real estate companies

Chart 8: Historical NAV discount levels and dynamic price-earnings ratios of Hong Kong stock real estate companies

Banks: Stock Mortgage Interest Rate Cuts Ten Questions Ten Answers

Q1: How do you understand the implementation of stock mortgage interest rates?

The method, timing, and policy logic of this stock mortgage reduction are basically in line with our previous expectations (see July 15, “Discussion on stock mortgage interest rate adjustments”, August 2How to adjust interest rates on stock mortgages”, August 22Why hasn't LPR been lowered in 5 years” etc.), the magnitude may slightly exceed expectations. We believe that the stock mortgage interest rate reflects the regulatory authorities' policy direction of promoting residents' consumption, reducing early loan repayment, and reducing arbitrage space for illegal replacement. It is estimated that the average reduction in stock mortgage interest rates this time will be about 50 bps, slightly higher than our previous neutral forecast, but lower than the extreme forecast situation.

Q2: What is the scale of interest savings?

Under the assumption that stock mortgages will be reduced by 50 bp, we estimate that the entire industry can reduce mortgage interest by about 200 billion yuan per year, which is equivalent to cutting interest rates by 10 bps in 1 and 5 years. If all is spent on consumption, it is equivalent to 0.5% of retail sales of social consumer goods in 2022. For individuals, assuming that the stock mortgage interest rate is lowered by 80 bps. Based on a mortgage loan of 1 million yuan and equal principal and interest repayment, we estimate that the borrower's monthly payment can be reduced by about 500 yuan, saving about 8% of the monthly payment and total repayment amount.

Q3: How to adjust the interest rate on stock mortgages?

We believe the main features of this mortgage interest rate reduction are: 1) using newly issued loans to replace stock loans, or stock mortgage loans to directly lower interest rates; 2) unopened interbank “remortgages”, and the original institution lowered it on its own to avoid disorderly competition; 3) limited the scope of the reduction to the first set of housing loans; 4) added the restriction that “the adjusted interest rate plus point margin is not lower than the lower limit of the first interest rate policy in the city where the original loan was issued”; 5) borrowers take the initiative to apply to banks, and banks are encouraged to issue batch announcements, etc. processing.

Q4: How are the adjustments made in different cities?

The rules require that the adjusted stock mortgage interest rate must comply with the local real estate policy at the time the loan was issued, that is, the new interest rate increase must not be lower than the lower limit of the first housing interest rate policy set in the city where the original loan was issued. According to current rules, each region determines the lower limit of local interest rates on the basis that it is not lower than the lower limit of the unified national interest rate (currently the first set is LPR minus 20 Bp, before May 2022 is the LPR level) in accordance with the principles of city-by-city policies, and banks determine specific interest rate levels on the basis of various underground limits. Therefore, the margin of increase and reduction in mortgage loans is closely related to the extent to which interest rates at the time of issuance were higher than the lower limit at that time. For example, when the loan was issued, the lower local interest rate was 5.00% (LPR+10bp), the issuance interest rate was 6.00% (LPR+110bp), and the current interest rate was 5.30% (LPR+110bp), then the current reduction is 100 bps (down to 4.30%). We have observed that the first set of new issuances since 2022 has declined by about 135 bps. Second- and third-tier cities have generally drastically lowered the mortgage credit plus point margin. We expect second- and third-tier cities to reduce mortgage stock by more margin this time (estimated average of 80 bp or more), and that first-tier cities will adjust less (if they are already at the lower interest rate limit at the time of issuance, there is no room for interest rate cuts).

Q5: How much will interest rates on stock mortgages be reduced?

According to the current rules, we initially expect that the first home loan will account for about 80%-90% of the total mortgage stock. Of these, loans that meet the mortgage reduction conditions will account for about 80%, and the loans involved will account for about 2/3 of all mortgage loans. The total stock mortgage interest rate has declined from the current 4.7% to around the 5-year LPR level of 4.2%, with an overall average reduction of about 50 bps. Due to the complexity of regions and interest rate levels actually involved in loans, the decline in actual interest rates is yet to be further implemented in the rules.

Q6: The impact on bank profits?

We believe that the impact of lower stock mortgage interest rates on banks first needs to be considered the impact of lower mortgage interest rates, lower deposit interest rates, and reduced early repayments (estimated using 2023E Bank forecast data): 1) Assuming that interest rates on stock mortgage loans are lowered by 50 bps, we estimate that the impact will affect the bank's net interest spread of 7 bps, operating income 3%, and net profit of 6% (annualized); 2) The recent deposit interest rate cut is also about to be implemented [1]. Among them, the one-year rate cut is 10 bps, the two-year period is reduced by 20 bps, and the three-year period is 25 bp. We estimate the average reduction in interest rates on term deposits is about At 15 bps, we estimate that the bank's net interest spread is 4 bps, revenue is 2%, and net profit is 3%; 3) After the mortgage interest rate is lowered, interest spreads on stock interest rates, financial product yields, and operating loan interest rates have narrowed. We believe it is expected to reduce the early repayment phenomenon caused by early repayment and illegal mortgage replacement. Assuming that the early repayment rate falls by 5 ppt, we expect to contribute 2 bps to the bank's net interest spread, 1% in revenue, and 2% in net profit.

Overall, we expect interest rate cuts on deposits and reduced early repayments to partially hedge against the impact of interest rate cuts on stock mortgages. Since large state-owned banks have a higher mortgage loan ratio, interest rate cuts on stock mortgages have a relatively high impact on large banks, and have relatively little impact on stock banks and regional banks. (For detailed measurement data, please refer to the report)

Q7: How about lowering the pace of time?

The rules state that from September 25, 2023, borrowers can voluntarily apply to lender banks. At the same time, “financial institutions should quickly formulate specific operating rules, organize and implement them, improve service levels, respond to borrowers' applications in a timely manner, and take convenient measures as much as possible to reduce borrowers' operating costs.” We expect the downgrade to be carried out in an orderly manner from the fourth quarter of this year to the beginning of next year. It is expected that banks will reduce negotiation costs by issuing announcements and batch processing. The impact on bank profits is likely to be concentrated mainly in 2024.

Q8: Does “buy a house without applying for a loan” apply?

The rules state that stock mortgages include not only the first set of personal housing loans that have already been issued, but also other stock loans where the borrower's “actual housing conditions meet the standards for the first housing in the city where they are located”. We expect that after the adjustment of the “house approval, no loan approval” policy adjustment, some of the loans that were previously applied to interest rates for the second home may also be included in the reduction of stock mortgage loans.

Q9: How do you view the down payment and new issuance interest rate adjustments?

In addition to the rules for lowering interest rates on stock mortgages, the People's Bank of China and the State Administration of Financial Supervision and Administration also issued the “Notice on Adjusting and Optimizing Differentiated Housing Credit Policies”, the main contents of which are: 1) no longer distinguishes between cities that implement “purchase restrictions” and cities that do not implement “purchase restrictions”; the lower limit of the minimum down payment ratio for the first and second housing loans is unified to not less than 20% and 30%; 2) adjust the lower limit of the national policy for the first housing interest rate to no less than LPR plus 20 bps.

The CICC Real Estate Group believes that the strength of this policy has exceeded the market's previous expectations, will effectively lower residents' purchase thresholds and costs, promote the release of potential and reasonable demand for home purchases. At the same time, it will also have a positive guiding effect on market expectations, and jointly drive a steady recovery in future market sales. We believe that lowering the down payment ratio is also expected to boost credit investment, improve banks' “asset shortage” and the quality of assets exposed to public real estate (see”Real estate loan leverage window opens”).

Q10: How do you view current bank stocks?

Overall, although the reduction in stock mortgage interest rates may have an impact on bank profits, reduced early loan repayments and lower deposit interest rates can be partially hedged, which also shows that the regulation is concerned about bank interest spreads and “reasonable profits” (see “”New Clues to Monetary Policy”). Furthermore, the reduction in the down payment ratio and the lower interest rate limit for newly issued mortgages also opened up room for subsequent real estate policy relaxation. Considering that previously the market fully anticipated interest rate cuts on deposit mortgages, the market sentiment reflected in valuations was too pessimistic, and that the real estate policy is expected to relax, our views on bank stocks are more positive.

risks

The implementation of the policy is uncertain, and there may be errors in the estimates.

Chart: Mortgage loans rose by about 100 bps compared to the benchmark interest rate in 2018-2021

Chart: Residents repay their loans early or are lower than stock mortgage interest rates due to declining returns on financial assets

Note: Stock mortgage interest rates are estimated using data disclosed by listed banks

Chart: Mortgage interest rates have reached a historically low, and there is still room for the down payment ratio to decline

Note: The average down payment ratio is an estimate of the average of all buyers, including those with unused loans

Chart: Interest rates on long-term term deposits have been lowered a lot since 2021, and the interest rate curve has flattened

Chart: We estimate that an 80bp reduction in stock mortgage interest rates can reduce monthly payments by about 8%

Note: The assumption here is based on market research, and the calculation of the monthly savings reduction is based on hypothetical scenarios. The actual situation may vary
Source: Wind, CICC Research Division

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