BEIJING, Oct. 19 (Xinhua) -- Banks in China's major cities have started raising mortgage rates for first-home buyers, putting further pressure on prospective buyers and the real estate market.
China Construction Bank, China's second largest state-owned bank by market value, on Oct. 15 announced an increase of its mortgage rate for first-home buyers to 1.05 times of the central bank's benchmark lending rate. China's commercial banks in at least 14 major cities also have lifted the rate by 5 to 10 percent.
Before 2010, it was common practice for Chinese banks to offer first-home buyers a discount of 30 percent off the benchmark mortgage rate. The discount was then gradually reduced to 15 percent in mid-2010, and then canceled in early 2011.
The total mortgage payment for first-home owners has increased up to 40 percent from previous discounted rates.
Although three state-owned banks have not yet followed suit, applicants now find it almost impossible and time-consuming to get home loans at a benchmark lending rate from them.
According to Shanghai Xiangyang Real Estate Agency, even if their customers successfully secure a mortgage at a desirable rate, two months is the shortest waiting time to get the approval.
Some first-home mortgage applicants are even willing to accept a higher mortgage rate to land a loan earlier.
Some commercial banks in Shanghai, such as Guangdong Development Bank and China Everbright Bank, confirmed that they had already lifted rates 10 percent two months prior to the China Construction Bank's announcement.
Analysts attributed this first-home mortgage rate hike to the central bank's tightening of banking credit quota and banks' negative outlook for China's real estate market.
People's Bank of China, the central bank, has raised the bank reserve ratio for six times this year to counter inflation. The tightening has led to a plunge of new bank lending, an important indicator of monetary supply, which tumbled from 739.6 billion yuan in April to 470 billion yuan in September, according to central bank data.
"Given the liquidity pressure, banks need to reallocate their dwindling credit to other more profitable loans. Raising the mortgage rate is one of the approaches we rebalance demand and supply," said Zhu Xiaohuang, vice president of China Construction Bank's Beijing Branch.
Banks' consecutive acts further reflects Chinese banks' prevalent perception of high risks in the real estate market, said Yin Zhongli, deputy director of the Institute of Finance and Banking at the Chinese Academy of Social Sciences.
"Raising lending rates to hedge anticipated risks is reasonable and a standard international banking practice. Hikes of the first-home mortgage rate revealed that the banking sector's increasingly pessimistic outlook of China's housing market. As for how this trend would develop depends on market reactions and the regulative authorities," Yin further explained.
According to research into the housing market by Zhongyuan Group released in October, first-home purchases account for more than 50 percent of total transactions in residential housing market in the 30 major Chinese cities surveyed.
The percentage of first-home purchases in Beijing reached 88.5 percent in the first nine months of 2011.
Realtors in major cities share the view that this mortgage rate increase would strengthen the wait-and-see attitude of many first-home buyers. According to central bank's survey of 1,400 urban households in the third quarter of 2011, only 14.2 percent households showed willingness to purchases homes in the fourth quarter -- the lowest figure since 2009.
On the supply side, the increase may have minimal impact on sellers not short of cash, but is likely to act as a catalyst for those cash-strapped sellers to lower prices.
"Real estate lending by banks should be able to differentiate the demand for speculative purposes from regular housing demand, and thus help the government to optimize regulations of the real estate market rather than to dampen the inelastic demand for first homes," said Yang Hongxu, director of the Comprehensive Research Department at Shanghai Yiju Real Estate Research Institute.
Although the prospects of China's real estate market remain unclear, all indicators suggest gradually changing market expectations and mounting downward pressure on housing prices, Yin said.