Beijing luxury market under mortgage tightening

Although the smog has been an ongoing problem in Beijing, residents’ purchase sentiment on luxury houses was not weakened. 1,516 luxury residential properties with a price of over RMB 80,000 per sqm were sold in 2016, doubled from 2015’s figure. Yet, the recent tightening on mortgage loans may change the future of Beijing market.

The worries over air problems did not stop the sales of luxury houses in Beijing since there are good job opportunities available. In order to protect health, many Beijing people look for houses away from the densely populated urban areas or those with good indoor air purification systems. Besides, the major reasons of the red-hot luxury market are the huge liquidity under the loosening monetary policy of the People’s Bank of China and the fact that the Chinese economy is softening, which have led to a lot of capitals flowing into the property market, particularly the high-end market. The huge wealth from the Internet and new energy industries has also resulted in the substantial demand for luxury residential properties.

However, some first and second-tiered cities in the mainland have tightened mortgage loans, and Beijing is one of them. Starting from February 8, a number of banks in Beijing have increased the interest rate of the first house mortgage to at least 90% of the benchmark interest rate, and shortened the maximum mortgage period of second houses, including new houses to 25 years from 30 years. The 5 major banks, some small-and-medium-sized banks and foreign banks have implemented the new mortgage rate policy for first house of not less than 90% of the benchmark rate, that is 4.41%, with the minimum down-payment ratio of 35%. For the second or later purchases, the required down-payment ratio is at least 50%, with the minimum rate of at least 1.1 times of the benchmark rate, or 5.39%.

It is the first time for Beijing to shorten the mortgage period from 30 years to 25 years. Under the circumstance of unchanged income, shorter mortgage period means a smaller total loan amount, which in turn dampens the purchasing power. In fact, the credit has been being gradually tightened since the end of last year, where some banks have limited the mortgage amount every month to be 10% less than last month. Despite of this, the amount of household medium-to-long-term loans surged 49% m-om in January 2017 to RMB 629.3 billion, 32% higher than the same period last year.

We believe that the substantial increase in loan amount is the reason why the government further tightened the credit in February. With the reduced discount for the first house mortgage rate and the shorter mortgage period for second houses, cooling of the overall Beijing home market is expected to accelerate this year. Regarding the luxury market, the tightening on mortgage will have little impact on the buyers as their purchase power is relatively stronger.

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