After much anticipation, the policy to lower the interest rates on existing mortgages has finally been clarified: on September 24, 2024, the central bank announced a reduction in the interest rates on existing mortgages and a unified minimum down payment ratio for mortgages, along with other supportive policies in the real estate sector.

The specific details are as follows:

Firstly, commercial banks are guided to reduce the interest rates on existing mortgages to a level close to that of newly issued loans, with an expected average reduction of about 0.5 percentage points.

Secondly, the minimum down payment ratio for mortgages on first and second homes is unified, with the national minimum down payment ratio for second home loans being reduced from the current 25% to 15%.

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Thirdly, the central bank's support ratio for the 300 billion yuan in affordable housing re-lending created by the People's Bank of China in May is increased from the original 60% to 100%, enhancing the market-oriented incentives for banks and purchasing entities.

Fourthly, the expiration dates for operational property loans and the "Financial 16 Articles" policy documents, which were due by the end of the year, are extended to the end of 2026.

Fifthly, support is provided for the acquisition of real estate companies' existing land. Studies are being conducted to allow policy banks and commercial banks to lend support to qualified enterprises for the market-oriented acquisition of real estate company land, to revitalize existing land use, and to alleviate the financial pressure on real estate companies. When necessary, the People's Bank of China can also provide re-lending support.

The value of these five policies is undeniable, and I personally believe that, from the central bank's perspective, they have done their utmost to support the overall real estate market.

Next, I will provide an interpretation from my personal observation level regarding the reduction of existing mortgage interest rates and the decrease in the down payment ratio for second homes, especially under the support of these policies, and share my basic judgment on how the Chinese real estate market will evolve.

Firstly, concerning the policy on existing mortgages, as the interest rates on new mortgages have been reduced multiple times, the interest rate gap between existing mortgages and new mortgages has widened significantly.Especially after the "5.17" policy, with the removal of the lower limit on mortgage interest rates and the downward trend of the LPR (Loan Prime Rate), the decline in new mortgages has been significant. In many cities, the interest rate for the first mortgage has dropped below 3% (including first-tier cities like Guangzhou), making the existing mortgage interest rates seem excessively high compared to the new ones. A considerable portion of the existing mortgage rates are above 4%. To avoid greater interest losses, many people choose to repay their loans early. It should be said that repaying loans early is a rational choice, as it is not easy to find financial products and investment opportunities with a return above 4% in the current economic climate where overall returns are declining.

Although last year saw a reduction in the interest rates for existing mortgages, the scope of the reduction was limited, the conditions were stringent, and the rates could not be lowered below the minimum mortgage interest rate set for each city at that time.

After the "5.17" new policy, the policy lower limit for national mortgage interest rates was lifted, leading to a significant decrease in mortgage interest rates. The gap between new and old mortgages has further widened, especially in past hot cities where the interest rate加点 (add-on rates) were substantial, resulting in a larger interest rate difference between old and new mortgages.

Considering that the reduction in mortgage interest rates was introduced in the context of a deep adjustment in China's real estate market and as a special measure by the government to stabilize the real estate sector, we believe that it is reasonable and fair to also reduce the interest rates for existing mortgages.

If the rates are not reduced, on one hand, it would be detrimental to the stability of the real estate market, and on the other hand, it would force borrowers to repay their loans early. Considering that mortgages remain a high-quality asset for commercial banks, the interest loss due to early repayment is visibly significant. Reducing the interest rates for existing mortgages would be beneficial for banks, individuals, and the real estate market.

After this reduction, according to the central bank's statement, the expected average decrease is around 0.5 percentage points, which will benefit around 50 million households and 150 million people. The total annual interest expenditure for households is expected to be reduced by approximately 150 billion yuan, which is undoubtedly a win-win outcome.

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The second policy pertains to the unification of the minimum down payment ratio for mortgages to 15%. On a national level, commercial personal housing loans will no longer distinguish between first and second homes, with the minimum down payment ratio unified at 15%.

When I first advocated for this policy, many people did not understand it. This shows that after years of regulation, many people's thinking has become rigid. The policy of differentiated down payment ratios and interest rate levels for mortgages was introduced during the overheating of China's real estate market to suppress demand. The criteria for determining down payment ratios and mortgage interest rates were not based on risk principles but on the number of homes owned.

The down payment ratio and interest rates for the first home are lower, while for the second home, they are higher. This also means that the previous policy for second mortgages was punitive rather than encouraging. In some hot cities, especially first-tier cities, the highest down payment ratio for the second home reached 70% to 80%, which is definitely the highest in the world, and the interest rates were also punitive, with a high degree of add-on rates.Now, the real estate market has reversed, with demand shifting from primarily first-time homebuyers to those seeking improved housing conditions. The goal of real estate policies is also to encourage improvements. Housing prices are in a downward trend, and the market is no longer overheated. It is clear that determining down payment ratios and loan interest rates based on past practices to curb the overheating of the real estate market does not align with the current market fundamentals.

In fact, this policy should have been changed long ago. I have been advocating for this policy change since at least 2021. The excessively high down payment ratios and interest rates for second homes have suppressed genuine improvement demands, which runs counter to our advocacy for the public to improve their living conditions.

I call for mortgage policies to return to risk-based pricing, moving in the same direction as the policy goal of encouraging improvements.

I even believe that, given that most people who buy second homes across the country have better payment capacity and economic conditions than those buying their first homes, their down payment ratios should be lower than those for first homes. This is the principle of risk allocation. The recent adjustment of down payment ratios is, in my view, only the first step. The mortgage interest rates should also be unified, at least making the interest rates for first and second homes consistent, to reflect the policy inclination towards encouraging improvement demands.

Some people ask me, after these policies are introduced, how will the Chinese real estate market evolve, and have housing prices bottomed out?

To be honest, considering the prolonged duration and excessive magnitude of market adjustments, the current situation in the Chinese real estate market remains severe. The market risks have not significantly improved, and expectations remain weak. Looking at real estate market indicators, the main indicators such as real estate development investment, real estate sales, and new housing starts have all dropped by about half from their historical peaks. Cities where housing prices have fallen by more than 30% are also the majority. Therefore, I have always believed that, from the data, the market equilibrium point has been reached, and the market has, to some extent, over-adjusted. But why is the market still undergoing deep adjustments?

The reason is simple: the main risks in the market have not been completely cleared.

Especially the risk of ensuring housing delivery and the industry risks triggered by the capital chains of developers have not bottomed out. This leads to the deterioration of risks and the stampede effect in the market, resulting in extremely fragile market confidence. Any slight change can trigger a panic, causing greater market panic. The key to resolving risks lies in combating risks with strong, targeted policies. Under current circumstances, the market cannot complete risk clearance through self-adjustment alone.

Therefore, I have always emphasized that policies must be timely, precise, and a bit harsh. Policies should overcorrect, as the risk is not in being excessive but in being insufficient.

Based on the varying degrees of policy strength, I personally believe there are three possible trends for the future of China's real estate market:The first scenario, the most optimistic one, suggests that with the support of policies, the market will bottom out by the end of this year, risks will be cleared, and the market will begin a slow recovery, provided that the government provides strong guarantees to resolve risks. To ensure the delivery of housing and to address the capital chain and inventory of the real estate market, all possibilities of policy will be exhausted, even including implicit guarantees.

The second scenario, in the absence of strong policy support or if policies remain slow, given that market risks continue to deteriorate, the market will continue to overreact, and the process of market bottoming out will take another 3 to 5 years. Drawing on past international precedents, during this process, housing prices may experience a general halving (including in first-tier cities).

The third possibility, which is the most pessimistic, refers to the Japanese model. Due to the failure of policy intervention, significant changes in the economic cycle, and the peak of population and other factors, real estate could fall into a slump lasting more than 10 years. This is the situation we least want to see and is what our policies need to strongly avoid.

I believe that the key to which trajectory the real estate market takes still lies in the strength and precision of policies. As long as we are determined to stabilize the market, we can definitely do so. However, now is the time for action. We cannot say we have no choice, but indeed, there is no more time to wait.