China to relax floor on mortgage rates to revive housing sector

© Reuters. Unfinished apartment buildings stand at a residential complex developed by Jiadengbao Real Estate in Guilin, Guangxi Zhuang Autonomous Region, China September 17, 2022. REUTERS/Eduardo Baptista

BEIJING (Reuters) -Chinese local governments may relax the floor on mortgage rates for first-time home buyers in some cities in phases, the central bank said on Thursday, in a bid to prop up property prices and revive a flagging engine of the world's second-largest economy.

Localities would be allowed to decide whether to maintain, lower or scrap the floor for such buyers by the end of 2022, the People's Bank of China (PBOC) said in a statement on its website.

In May, the central bank lowered the floor of mortgage rates for first-time home buyers to 20 basis points below the loan prime rate (LPR) with similar maturity. The five-year LPR, the benchmark reference rate for mortgages, stands at 4.30%.

For cities where the selling price of new commercial residential housing fell month-on-month and year-on-year between June and August 2022, the lower mortgage rate limit would be relaxed, the central bank said.

"The introduction of such policies and measures is conducive to supporting governments in cities to make full use of the policy toolbox to promote the steady and healthy development of the real estate market," the central bank said.

Banks and customers may negotiate to determine the specific interest rate of new housing loans, which would help reduce borrowers' debt burden and better support housing demand, it added.

China is gearing up to tackle a deepening property crisis - a key drag on the world's second-largest economy, as home buyers refuse to make mortgage payments on unfinished buildings and developers' financial strains further hurt confidence in the sector.

"To defuse risks in the property industry, it's necessary to stabilise residents' expectations, incomes and purchase intentions, ensure rigid demand for housing, reasonably support improving demand and promote stable recovery of market sales," said Bruce Pang, chief economist and head of research for Greater China at Jones Lang LaSalle.