China’s central bank announced its first interest rate cut on 21st November, with one-year lending rate slashed by 0.4 percent to 5.6 percent. The property market of first-tier cities responded to the stimulus measure quickly. Shanghai has recorded 910 transaction cases over the week right after the interest cut, which is up 2.4 times w-o-w. Both transaction volumes and property enquiries in Beijing and Shenzhen have increased drastically. The interest cut can help reduce mortgage payment and the cost of home purchase, which increasingly meets the demand of end users. In the short term, both transaction price and volume on mainland property market will rebound.
Despite the stimulus brought by interest cut, long term threats to the mainland property market (such as oversupply and capital shortage) still exist at the moment. The interest cut is also deemed as a sign of slowdown in economic growth in China. Amid the economic downturn atmosphere, investors have retreated and the major demand for property currently comes from end users, making the de-inventory process more difficult. Though experts suggest there are chances that Central Bank will introduce another round of interest cut in the near future, a strong rebound in the housing market is still not guaranteed in the long term. Moreover, since local banks adjust their own interest rates in different ranges, the lending rate to small and mid-sized developers may not be as relaxed as expected.
Soaring home prices and over-expansion of cities in China fuelled concerns regarding the mismatch between general purchasing power and rise in housing prices. After a series of adjustment policies issued by the Chinese government, the mainland housing market is gradually returning to user-generated demand. To strive for long term sustainable development, developers should focus on boosting sales volume instead of driving up housing prices under the interest cut, or the mismatched gap will be further widened.