The effect of monetary policies on China housing prices

The effect of monetary policies on housing prices

China’s monetary policies are the key driving forces of the country’s housing prices. Apart from maintaining the value of its currency and fostering economic growth, the goals of China’s monetary policies also include facilitating healthy development of the real estate market as well as stabilising the growth of home prices.

>> Heightened control on the real estate industry

Major monetary tools used by the People’s Bank of China (PBOC) include interest rate policy, reserve requirements and credit policy. PBOC uses the interest rate policy as a monetary policy tool by setting the benchmark lending rate which is a key reference for banks in determining their own lending rates. Banks can only offer interest rates fluctuating within the floating range of the benchmark rates. Since mortgage rates offered by banks are generally according to the long-term (over five years) benchmark bank loan rate, the trend of benchmark rates set by PBOC has a significant impact on housing prices.

>> Growth of money supply remains high

To cope with China’s economic slowdown in 2015, PBOC gradually lowered the benchmark rate and cut the required reserve ratio (RRR) a couple of times. Reduction in the benchmark rate and the RRR lead to money supply expansion. An acceleration of money growth strengthens the loan-making ability of commercial banks, which in turn increases the loans made to the real estate sector. In addition, faster growth of money supply will affect the public’s inflation expectations and increase the demand for non-monetary assets such as real estate, which underpins the increase in housing prices.

Moreover, credit policy is made by PBOC to direct financial institutions’ credit size and structure. PBOC usually achieves this by proclaiming a series of specific notices or holding interviews with CEOs of major financial institutions. For example, PBOC revised the real estate credit policy by changing the mortgage minimum down payment for regular-sized first homes, large-sized first and second homes, and issued guidance to expand or restrict the supply of bank credit to the real estate sector. This can affect the housing price by controlling the loans made by banks for the real estate sector.

>> An urbanised property market

The growth of money supply has slowed down in recent months. Narrow money (M1) y-o-y growth decreased to 17% and 15% in May and June respectively from over 20% in 2016. Broad money (M2) y-o-y growth also decreased to less than 10% in May and June from 10%-14% in 2016. With the slowdown of money growth and the tighter controls on credit policy which has been effective since March, the increase of housing prices is expected to slow down in the second half of 2017. Of course, monetary policies are just part of the many factors affecting the housing market. Housing prices are also affected, among other things, by supply and construction costs. Even the Government is unable to fully control the housing price. Therefore, monetary policies can only give us some indications on the outlook of the market.

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