LPR makes GBA heads spin

The new Lending Prime Rate is now being used by banks to set mortgage rates, and its launch has been underwhelming, with most banks sticking to the plan or slightly raising their rates. 

This is not to say the gap between the LPR and individual banks’ rates can’t widen over time. But right now, only a foolish bank manager would ask for a target to be placed on their back by thinking they can undercut their competitors aggressively on the first day. 

In Guangzhou, local media quoted senior bankers as saying that, at present, the “guiding price” given by the “self-regulation mechanism” of interest rate pricing in the city is consistent with the central bank’s guidance. That is, the interest rate of the first home mortgage should not be lower than the LPR quotation in the corresponding term, and the interest rate of the second home mortgage should not be lower than the LPR quotation in the corresponding term plus 60 basis points.

The Big Four banks in Guangzhou – ICBC, ABC, BOC, and CCB – left their policy unchanged. This resulted in a slight rise in lending rates. The interest rate of the first mortgage was not lower than the LPR plus 54 basis points (5.39%), and the second was not lower than the LPR plus 78.5 basis points (5.635%). 

Other banks followed suit. HSBC went from 5.39% to 5.45% on the first mortgage, while Guangdong Development Bank went from 5.39% to 5.52%.

Shenzhen was slightly different. The guidance was for first mortgages to not be less than LPR plus 30 basis points, and the second to be not less than LPR plus 60 basis points. The lowest limit of the rate on first mortgages remains at 5.15%, and 5.45% for the second. 

Yan Yuejin, research manager of E-House Research Institute Center, was quoted as saying that it would take time to see competitive differences in the market. Once first-tier cities such as Guangzhou and Shenzhen had led the way with stable rates, others would have to follow suit.

Zhang Dawei, chief analyst of Zhongyuan Property, was quoted as saying by Securities Daily that overall, before and after the implementation of the LPR policy, the mortgage rates of Banks around the country will not change. At present, the mortgage rates are basically stable and there is no obvious fluctuations, so the mortgage rate in other Greater Bay Area cities will also remain stable.

However, it will be interesting to see how the GBA’s nine cities respond over time to their vastly different local conditions. Foshan’s property market, for instance, is in worse shape than Shenzhen’s. It would make more sense to give first-time buyers a break, as Shanghai has done, allowing its banks to price first mortgages below the LPR rate – by as much as 20 basis points.

That will likely be just as much of a political decision as it always has been. Foshan’s property market is soft at the moment because it needed to have hot air taken out of it after catching the attention of central government housing officials. At what point local authorities feel emboldened to respond to local demand, rather than worry about Beijing’s ire, will be telling about the pace of reforms in the GBA.

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