Raising interest rates to reinforce effects of real estate macro-control

People in the real estate industry generally believe that although raising interest rates is not a direct macro-control measure on the real estate market, it will a have huge impact on the sensitive market.

Raising interest rates will reinforce the effects of the "10 Measures of the State Council" and the "Five Measures" launched at the end of September, increase costs to real estate speculators and further suppress the motivation to purchase housing, especially among those who hope to avoid inflation.

Raising interest rates will tighten market liquidity and lower inflation expectations.

"The '10 Measures of the State Council' was already quite strict. An important reason for the housing price rebound in August and September is that many people had strong inflation expectations, and it seemed like buying houses was one of the few ways for them to evade inflation," said Zhang Dawei, director of the Market Research Center of Centraline Property.

Zhang believes that raising interest rates will tighten the liquidity in the market, lower inflation expectations and therefore control purchases by those who seek to avoid inflation.

The policy with the greatest impact on the real estate market is the increase of the benchmark lending rate for loans over five years, from more than 5.9 percent to more than 6.1 percent. If one borrows 1 million yuan to buy a house and needs 30 years to repay the loan in matching principal and interest, he or she will enjoy 85 percent of favorable interest rates for purchasing his or her first house. He or she needs to repay 5,398 yuan each month before the increase of the interest rate, and 5,502 yuan each month after the increase of the interest rate, which is an increase of 104 yuan.

If this is the second house, the interest will be 1.1 times of the interest rate and the purchaser will need to repay 6,488 yuan each month after the increase of interest rate, an increase of 145 yuan.

"The interest rate rise indicates that the cost of holding real estate will gradually increase," said Lin Qian, vice president of the Lianjia Real Estate Agency.

She believes that the means of increasing the holding costs of real estate speculators is relatively weak compared with other current real estate macro control policies. As related departments have proposed to gradually popularize the housing property tax pilots nationwide, the expectation for the increase of holding costs has been formed, which will be affirmed after China's central bank decided to raise the interest rates. In addition, as the down payment of second homes has been increased to 50 percent and 1.1 times of interest rate applied, the costs of purchasing a second house will greatly increase and the speculative investment demand will be further suppressed.

Some small developers and second-hand house owners may first reduce housing prices.

The down payment for the first house has recently increased to 30 percent, and the bank interest rates were also increased. This will significantly increase the down payment pressure and interest costs on buyers. Some private house purchasers who have a weak financial and repayment capability may postpone their purchasing plans. It is expected that raising bank interest rates will increase the control force of housing prices and affect the psychological expectations of home purchasers. Therefore, the entire market demand will further cool off to stabilize housing prices.

"Raising interest rates means that the developers will no longer have sufficient funds," said a general manager of a real estate development company in Beijing.

The financial institutions have tightened the real estate development loans. Therefore, raising interest rates will increase interest costs of the existing housing development loans and compel developers to speed up opening and sales of the real estate, shorten the sales cycle and withdraw funds as soon as possible to repay loans.

It is expected that the developers will accelerate the launch of real estate and a new sales boom will appear in the market. Some small developers with limited funds and second-hand house owners who urgently need to improve their houses will probably first reduce housing prices. The housing prices will be more likely to decline.

By People's Daily Online