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recently, bloomberg, which is always well-informed, broke the news about great news for china's mortgage market.

this round of news is divided into several steps. first, at the beginning of the month, sources said that china is considering further lowering the interest rates on existing mortgage loans and allowing existing mortgage loans to be converted into mortgages.

on september 4, bloomberg further detailed the news, saying that financial regulators have proposed to cut the interest rates on existing mortgages by a total of about 80 basis points. the first cut will take place in the next few weeks, and the second cut will take place at the beginning of next year, applying to both first and second homes.

some media groups have predicted that interest rates will be cut by 20 to 50bps around september 12, and existing mortgage loans will be reduced simultaneously.

the world has suffered from the high interest rates on existing mortgages for a long time! regardless of whether the first round of interest rate cuts will come this month or next month, if the interest rates on existing mortgages can be lowered, it will also be a response to public opinion.

so, the question is, is this news from bloomberg reliable? i think there are two aspects to it.

on the one hand, there is a tradition in the country to release some sensitive policy developments, which is to "export the news and sell it domestically", letting foreign media release the news first to test the domestic public opinion reaction. if the response is not good, the official only needs to dispel the rumor; if the response is good, then it will be released half-heartedly.

on the other hand, the source of this news is closely related to the conference in july. on july 26, the central bank released the annual "china regional financial operation report (2024)", which mentioned: "the next step is to straighten out the relationship between incremental and existing mortgage interest rates, effectively reduce the interest burden of residents, and release the public's investment and consumption motivation." since we want to reduce the interest burden of residents, we must start with the interest rate of existing loans.

on september 5, at a press conference on the theme of "promoting high-quality development" held by the state council information office, zou lan, director of the monetary policy department of the people's bank of china, said in response to questions about lowering the reserve requirement ratio and interest rates that there is still room for lowering the reserve requirement ratio, but due to factors such as the narrowing of banks' net interest margins, there are certain constraints on further downward movement of deposit and lending rates.

what are the "certain constraints"? of course, they are to maintain a reasonable profit for the bank.

since the beginning of this year, the loan market benchmark rates (lpr) for terms of one year and five years or more have decreased by 0.1 and 0.35 percentage points respectively, driving the average loan interest rate to continue to decline.

according to statistics from centaline property research institute, the average interest rate for first home loans nationwide has fallen to around 3.25% in august 2024, and the average interest rate for second home loans is 3.6%. the overall average mortgage interest rate in august was around 3.3%. however, some cities and some banks have entered the "2 era" from the "3 era".

currently, the first home loan interest rate of some banks in suzhou is as low as 2.95%, and the lowest home loan interest rate of some banks in foshan and guangzhou can be as low as 2.9%.

according to the people's bank of china's "china monetary policy implementation report for the fourth quarter of 2023", the interest rates of more than 23 trillion yuan of existing mortgage loans have been lowered, and the adjusted weighted average interest rate is 4.27%.

citic securities research said that the current weighted average interest rate of existing mortgage loans is around 3.9% to 4%. therefore, the gap between the interest rate of new mortgage loans and existing mortgage loans is still around 100 basis points.

lu lei, deputy governor of the people's bank of china, also stated at the press conference on the same day that in terms of interest rates, the recent downward trend of policy interest rates and loan market benchmark rates should be leveraged to promote a steady decline in corporate financing and residents' credit costs.

there is another explosive point in the bloomberg news, which is that "existing mortgage loans are allowed to be transferred to mortgages." in other words, borrowers can go to the market to find banks, and as long as their bid is lower than the original interest rate, they can change banks, and they can change to whichever bank has the lower interest rate.

think about it, the domestic banking industry is very competitive today. since the interest rate for new houses has exceeded 3, and the existing stock is above 3.85%, there will definitely be banks willing to offer lower interest rates. as long as it is lower than 3.85%, borrowers will flock to it. for banks, it may be a nuclear-level shock.

wang liang, president of china merchants bank, responded to the rumors of "re-mortgage" at the mid-term performance meeting on september 2, saying, "if this policy is introduced, it will have a certain negative impact on the existing mortgage interest rates of the banking industry; the macro-management department will do a full demonstration and research before introducing such a policy."

if inter-bank mortgage transfers are not allowed, then banks should at least take the initiative to lower interest rates.

since 2023, the interest rate gap between existing and new mortgage loans has continued to widen, and the market has seen several waves of early loan repayments. after 2024, there has even been a phenomenon of forced loan defaults. the continued increase in judicial auction houses also shows that if the interest rates on existing mortgage loans are not lowered decisively, the next 38 trillion mortgage loans may trigger more risks.

the "2024 second quarter financial institutions loan target statistical report" released by the central bank shows that at the end of the second quarter of 2024, the balance of personal housing loans was 37.79 trillion yuan, a year-on-year decrease of 2.1%. in the first half of this year, the balance of personal housing loans decreased by 380 billion yuan.among them, the mortgage loan balance of the six major state-owned commercial banks decreased by 311.9 billion yuan.

banks are now facing a dilemma. if they do not lower interest rates, residents may continue to repay their loans in advance and banks will lose high-quality housing loans. however, if they lower the interest rate on existing loans, they will face urgent asset impairment.

whether to accept profit dilution or gamble that residents cannot continue to repay their loans in advance (loss of profit) is actually not a difficult choice for banks, they just need a pusher at the operational level.

first of all, the vast majority of banks are still profitable and have a relatively thick safety cushion. the six major state-owned banks achieved a total net profit of 683.388 billion yuan in the first half of 2024, and announced interim dividends totaling approximately 204.8 billion yuan (of which postal savings bank of china plans to distribute a dividend of 14.6 billion yuan).this shows that for banks, the current interest rate cut is still a question of how much profit they can make, not a life or death choice.

moreover, it is important to note that after july this year, the central bank guided commercial banks to lower deposit rates, with the one-year deposit rate falling from 1.76% to 1.55% and the five-year rate falling from 2.55% to 1.8%. in addition, it issued guidance that commercial banks are not allowed to compensate depositors for interest. this has laid the foundation for banks to lower the interest rates on existing loans.

secondly, the essence of lowering interest rates is to retain high-quality customers and high-quality assets. china's personal housing loan non-performing rate has been running at a low level. according to the 2024 interim report, among the state-owned banks, the non-performing rates of personal housing loans of industrial and commercial bank of china, agricultural bank of china, china construction bank, and bank of communications were 0.6%, 0.58%, 0.54%, and 0.48%, respectively. although there has been a slight increase from 2023, personal housing loans as a whole are still very high-quality assets. actively lowering interest rates can reduce early loan repayments on the one hand, and on the other hand, it can also prevent the introduction of nuclear-level policies such as cross-bank mortgage transfers, which will lead to "stealing" by peers.

the third issue is to determine the implementation path for reducing the interest rate of existing mortgage loans. ren zeping suggested that banks can reduce the interest rate of existing mortgage loans in a step-by-step and differentiated manner. banks should issue specific plans and supporting details as soon as possible to clarify the requirements and procedures of the two reduction methods, such as stipulating the size of customer assets and restricting borrowers from repaying in advance. the interest rate of existing mortgage loans can be reduced in a step-by-step and differentiated manner. for example, for existing mortgage loans whose interest rate is still higher than 4.5% on september 30, 2024, different levels can be divided and differentiated preferential policies can be given.

finally, we have to mention the current real estate situation.

according to the sales data of real estate companies in the first eight months of this year released by china index academy, the sales of the top 100 real estate companies fell by 38.5% year-on-year. more importantly, the national commercial housing sales fell from a high of nearly 18 trillion yuan in 2021 to 11 trillion yuan in 2023. however, even in 2024, the decline in the new housing market has not stopped, and this year it will fall below the 10 trillion mark.

according to the "basic situation of the national real estate market from january to july 2024" released by the national bureau of statistics on august 15, in the first seven months of this year, the national sales of commercial housing reached 4678.7 billion yuan, a year-on-year decrease of 25.9%; the national sales of newly built commercial housing reached 533.3 billion yuan, a decrease of 24.3%. this means that if the current downward trend continues, the commercial housing market will return to around 8 trillion yuan this year.

although lowering the interest rate on existing housing cannot directly promote new housing sales, it can stabilize confidence in the housing market, increase consumption capacity, and further promote economic recovery. based on the current total amount of 38 trillion yuan in existing housing loans in my country, if it can be reduced by 60-80bp, it will save 228-304 billion yuan in interest expenses for mortgage borrowers each year. this saved money can be invested in the terminal consumer market, which is also a significant force.

let the banks suffer a little. after all, they have had good times for decades. let’s overcome the difficulties together. it is the bank that has stepped forward.

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references: "the central bank responds to the reduction in reserve requirement ratio and interest rates", jiemian news; "the interest rates on existing mortgage loans should be lowered", zepin macroeconomics; "the interest rates on existing mortgage loans are waiting to be lowered", china real estate news.