The market's long-awaited reduction in interest rates on existing mortgages has come to fruition.

Affected by this, A-share real estate stocks and property stocks strengthened. As of press release, Sunshine Shares, Yatai Group, and Shanghai 900 had risen and stopped, CCCC Real Estate had risen by more than 4%, Nanguo Real Estate and Rongsheng Development had risen by more than 2%, and Xinhualian and I Love My Family had risen by more than 1%.

Hong Kong domestic housing stocks have surged, and the sector has been profitable for 5 consecutive trading days.

At the individual stock level, R&F Real Estate rose more than 17%, Sunac China and Shimao Group rose more than 9%, Agile Group and Xuhui Holding Group rose more than 6%, and Longhu Group, China Resources Land, and Greentown China rose more than 4%.

Four arrows go hand in hand

Today, the Central Bank of China announced a number of measures to support real estate and housing enterprises at a press conference.

First, reduce interest rates on existing mortgages and unify the minimum down payment ratio for mortgages. Guide commercial banks to lower interest rates on existing mortgages to close to interest rates on newly issued mortgages. The average decline is expected to be around 0.5 percentage points. At the same time, the minimum down payment ratio for the first home and second home is unified at 15%.

Second, the central bank will support the acquisition of existing land by housing enterprises. On the basis of using some local government special bonds for land reserves, the study allows loans from policy banks and commercial banks to support market-based land acquisition by enterprises in a position to do so, revitalize existing land use, and ease financial pressure on housing enterprises. The People's Bank of China can provide policy support when necessary.

Third, the central bank will optimize the affordable housing reloan policy. The central bank's financial support ratio in the 300 billion yuan affordable housing reloan previously created will be raised from 60% to 100%, increasing market-based incentives for banks and purchasers.

Fourth, extend the terms of the two real estate finance policy documents. Earlier, the People's Bank of China and the General Administration of Financial Supervision introduced 16 financial regulations and two phased policies for operating property loans. The validity period of the two policies will be extended from December 31, 2024 to December 31, 2026.

Among the above policies, what the market is more concerned about is the reduction in interest rates on stock mortgages.

Since this year, the central bank has lowered the 5-year LPR to 3.85% twice in February and July, respectively, with a cumulative reduction of 35 basis points.

According to previous estimates by Tianfeng Securities, the current average interest rate for existing mortgages is about 4.21%, while the average interest rate for newly issued mortgages in the second quarter of this year is 3.45%. The interest rate difference between the two is 76 basis points. Excluding the 35 basis point reduction in the 5-year LPR during the year, the maximum room for a reduction in stock mortgage interest rates is 40 basis points.

What is the impact on capital markets?

Currently, the real estate industry is still bottoming out. The central bank's major move has boosted market confidence, and the industry is expected to recover steadily.

Judging from past experience, there are two ways to adjust interest rates on stock mortgages: one is to directly change the interest rate level agreed in the contract, and the other is to replace stock mortgages through new loans.

In terms of investment, Tianfeng Securities believes that a reduction in mortgage interest rates will also increase the attractiveness of long-term bonds for bank allocation. As far as the short term is concerned, a reduction in stock mortgage interest rates is clearly beneficial to the bond market. It is short-term and neutral for the stock market, and it also makes the medium- to long-term improvement point likely to arrive sooner.

Open Source Securities believes that against the backdrop of a continuous drop in interest rates on new mortgages and the decline in commercial housing sales data that has yet to bottom out, an interest rate adjustment policy for stock housing loans has been introduced to help the housing market to bottom out and stabilize. Continue to be optimistic about strong credit real estate enterprises with high investment intensity, excellent layout area, and market-based mechanisms.

Recommended targets: 1) High-quality central state-owned enterprises such as Poly Development, China Overseas Development, C&D Co., and Yuexiu Real Estate; 2) Financially sound private enterprises and mixed ownership enterprises such as Vanke A, Greentown China, Binjiang Group, and Xincheng Holdings.

However, CICC pointed out that the pressure on housing prices due to high inventories in the next 1-3 years will still exist, the historical burden on the business side still needs to be digested, and the cycle of getting out of inventory and deleveraging will take time. In a situation where there is limited room for improvement on the profit and net asset side, the probability of long-term trending investment opportunities is low; however, potential policy adjustments in the short to medium term may still bring certain transactional opportunities.