If the interest rate on existing home loans is lowered, what is the potential space?

The financial, inflation, economic, and PMI data in August all reflect the current weak recovery trend in the economy. Looking ahead, September and October may be important observation windows for economic stabilization and policy intensification: firstly, the effects of previous policies are gradually being released, with the National Development and Reform Commission requiring the issuance of 300 billion yuan in ultra-long-term bonds to support "two new" projects by the end of August. The policy effects are expected to be reflected in the economic data for September. Secondly, a new round of policy windows is approaching, with fiscal policy accelerating, the central bank considering incremental reserve policies, likely to follow the Fed in interest rate cuts, and further observations on whether there will be an expansion of re-lending, central fiscal interest subsidies, interest rate cuts on existing housing loans, and the possibility of issuing more government bonds if necessary (similar to October 24, 2023).

Regarding the potential impact and relief effects of the interest rate cut on existing housing loans through financial institutions reducing residents' debt burdens and indirectly increasing disposable income, if implemented:

(1) Firstly, looking at the interest rate cut in September 2023, mainly targeting existing first-time home buyers, the central bank stated that "in the first week of policy implementation, 98.5% of eligible existing first-time home loan rates were lowered, totaling 497.3 million transactions, 2.17 trillion yuan, with an average reduction of 73 basis points", resulting in a reduction of 158.4 billion yuan in annual payments for residents.

(2) Secondly, if further implemented optimistically, it may include two parts of rate cuts: first, for existing non-first-time home buyers, similar to the supplementary rate cut in September 2023, the scale of existing non-first-time home loans is approximately 37.8-21.7/98.5% = 15.8 trillion yuan, with a reduction of 788-1182 billion yuan in annual payments for residents at 50-75 basis points; second, the removal of the lower limit on mortgage rates on May 17, 2024, resulted in a rapid 24 basis point decrease in the weighted average mortgage rate in Q2 2024, which existing housing loans did not benefit from. If this part is reduced by 30-40 basis points, residents could save 1134-1515 billion yuan annually. The combined potential reduction space corresponds to 1922-2693 billion yuan, accounting for 0.35%-0.49% of residents' disposable income in 2023. Considering the pressure on bank interest spreads, there is a possibility of the actual implementation falling short of expectations.

(3) In the special topic "On the Effective Boundary of Real Estate Demand Policies," we reviewed the timing of financial risks/real estate clearance in overseas countries, with a commonality being that residents' debt-to-income ratios converge at levels of 11%-13%. China also conforms to this rule. Looking ahead, if the interest rates on existing housing loans are lowered, the central bank follows the Fed in interest rate cuts, and there is an expansion of re-lending, this indicator is expected to improve to below 11%, leading to a short-term rebound in real estate. However, the core lies in income policies, which to some extent determine the resilience of the real estate market in the U.S. during a B-wave rebound, contrasting with Japan's lack of resilience

This article is excerpted from the report released by Open Source Securities Research Institute: "If there is a reduction in existing home mortgage rates, the potential space may be twice that of September 2023 - also commenting on the August PMI data" (Release Date: 20240831). For specific analysis content, please refer to the report. In case of any ambiguity arising from the excerpt of the report, the complete content on the day of the report's release should prevail.

Analyst: He Ning (S0790522110002), hening@kysec.cn

Contact: Chen Ce (S0790524020002), chence@kysec.cn