News Alert: PBOC and CBRIC in action to manage physical market’s downside risks
- PBOC and CBIRC granted local governments of eligible cities the discretion to periodically adjust their first-home mortgage rate floors up to end-2022
- We believe this is a move that aims to manage downside risk in cities that are facing severe headwinds, rather than an escalated tone of support to the physical market
- Sector volatility to remain given multiple uncertainties at play
- Sector picks: COLI (688 HK), CR Land (1109 HK),Yuexiu (123 HK), KE Holdings (BEKE US/2423 HK)
What’s new:
PBOC and CBRIC published a notice and granted local governments of eligible cities (those that have recorded consecutive residential ASP decline both on a m-o-m and y-o-y basis in the primary market between Jun to Aug 22) the discretion to decide on whether to maintain, reduce or cancel their respective first-home mortgage rate floors periodically up to the end of this year.
Our view:
A move that aims to avoid a potential market crash. Judging from the eligibility requirement of the move (consecutive residential ASP decline both on a m-o-m and y-o-y basis), we believe PBOC and CBIRC’s policy aim is to avoid a potential crash in cities where physical markets that are facing severe headwinds. 23 of the 70 Tier 1-3 cities that are monthly tracked by the NBS would fall under the eligibility requirement (5 Tier 2 cities, 18 Tier 3 cities, see table below for details).
Effectiveness in question. First home mortgage rate has been on the fall since Oct-21, with the average of 103 cities down by over 150bps by Sep-22 since the peak according to data gathered by Beike research institute. 86 cities of which are already at the allowed floor mortgage rate of 4.1%, and affordability is already at one of the country’s most favourable levels. Homebuyers are now staying on the sideline not only due to weak property price expectations, but also the rising uncertainty in China’s economic outlook. While further cuts is good-to-have and should show the regulator’s supportive stance for these eligible cities, we believe a mortgage rate cut may not be sufficient to meaningfully reignite local homebuyer sentiments.
Policy stance to remain gradual and controlled. We believe PBOC and CBIRC’s move is a supportive one, yet regulator’s core intention for a gradual and controlled pace in policy relaxations appears to be unchanged. With these in mind, we maintain our expectation that homebuyer sentiment to remain subdued, with the physical market activities to only record a mild pickup in 4Q alongside developers’ increase in project launches.
Volatility to remain; stay with quality names. Share price volatility in the sector is expected to continue in the near term as investor sentiment remains fragile, and there could be more bond extensions and defaults potentially on the way throughout 4Q22. Uncertain RMB outlook could also drag on the sector’s performance. We recommend investors to stay with quality names that are less impacted by RMB depreciation and able to benefit from the potential release of more policy supports – COLI (688 HK), CR Land (1109 HK) and Yuexiu (123 HK). We also like KE Holdings (BEKE US/2423 HK) which would benefit from the ongoing demand shift to the secondary market.
Which cities would meet the criteria?
Source: NBS. DBS