According to the latest report from Huachuang Securities, on October 21st, the 5-year LPR fell by 25 basis points to 3.6%. This rate cut marks the third rate cut within the year, with a total reduction of 60 basis points in the 5-year LPR over the year. If the LPR is further reduced by 10 basis points for loans longer than 5 years, based on a commercial loan of 1 million, with equal principal and interest repayments over 30 years, the monthly repayment amount is estimated to decrease by around 137 yuan. Due to residents' preference for residential assets, they often make housing purchase decisions from a cash flow perspective, essentially overlooking the opportunity cost of the down payment and instead focusing more on the match between rent and mortgage payments. Lowering the LPR again can to some extent reduce the cost of residential purchases, which is conducive to accelerating the market bottoming out.

Huachuang Securities' main views are as follows:

If the LPR for loans longer than 5 years is reduced by another 10 basis points, based on a commercial loan of 1 million, with equal principal and interest repayments over 30 years, the monthly repayment amount is estimated to decrease by around 137 yuan.

On October 21st, the 5-year LPR dropped by 25 basis points to 3.6%. This rate cut marks the third rate cut within the year, with a total reduction of 60 basis points in the 5-year LPR over the year. Following this rate cut, the minimum interest rate for first-home commercial loans in Beijing, Shanghai, and Shenzhen reduced to 3.15% (from 3.4% before the rate cut). The mainstream commercial loan rate for first homes in Guangzhou is LPR-75BP, likely to decrease to 2.85%. The minimum interest rate for first-home properties in second-tier cities will generally enter the "2%" range, such as Hangzhou, Wuhan, and Changsha implementing LPR-70BP, which may decrease to 2.9% after this rate cut.

According to the research institute of Zhongyuan Real Estate, by October 2024, the average national interest rate has dropped to around 3.3%. If the mortgage interest rate decreases from 3.3% to 3.05%, the monthly repayment amount for a 1 million loan over 30 years with equal principal and interest payments could decrease from 4380 yuan to 4243 yuan, with a monthly repayment amount estimated to decrease by around 137 yuan.

Due to residents' preference for residential assets, they often make housing purchase decisions from a cash flow perspective, essentially overlooking the opportunity cost of the down payment and instead focusing more on the match between rent and mortgage payments. Lowering the LPR again can to some extent reduce the cost of residential purchases, which is conducive to accelerating the market bottoming out.

Huachuang Securities stated that from the perspective of current residents buying houses, families without houses must pay rent every month, while those who buy houses need to pay monthly mortgage payments. The part where the monthly mortgage payment exceeds the sum of the family's monthly rent and monthly provident funds after buying a house is referred to as the additional expenses for the families with rigid demand. If the monthly payment = monthly rent + monthly provident fund, that is, the additional expenses are 0, then the cash flow pressure for families with rigid demand after buying a house is relatively small, and the house purchase decision may be smoother. Calculations based on 30%/40% down payment show that the rental yield in first-tier cities like Beijing and Shanghai and third- and fourth-tier cities like Yibin, Huizhou, Fuyang is relatively low. After this interest rate cut, it is at least 1.66%, 3.01% respectively, compared to the calculations in June (1.78%, 3.03%), it has decreased.

From the perspective of asset allocation, the affordable price bottom for first-tier cities and third- and fourth-tier cities is around 2.7% and 2.6% of the rental yield, respectively. Based on the rental yield equal to the weighted average cost of the liability end, with a 30%/40% down payment, the required rental yield in first-tier cities may reach 2.8% and 2.68% respectively, while in third- and fourth-tier cities it may reach 2.79% and 2.55%.

Interest rate reduction promotes market exploration, but attention is still needed on changes in residents' income.

From the perspective of affordable housing for residents, the rental yield in the first half of 2024 in first-tier cities (Beijing 1.81%, Shenzhen 1.69%, Guangzhou 1.89%) is close to the equilibrium level of rental yields after the interest rate cut (1.7%-2%). According to the model, it is gradually approaching the bottom price range. The mechanism determining house prices in first-tier cities does not simply depend on supply and demand, but also on residents' income expectations. According to the People's Bank of China's survey results for urban depositors in the second quarter, the confidence index in current and future incomes has not significantly improved.

In the first half of 2024, the rental yield in some third- and fourth-tier cities has exceeded 3%, gradually moving towards an equilibrium level. However, some lower-tier cities facing oversupply may still experience a downward trend in house prices.

From an asset allocation perspective, if the rental yield cannot significantly exceed the holding cost, it may be difficult to stimulate residents' demand for asset allocation, and policies are more likely to have a stabilizing effect.

Investment recommendation: Recently, there have been frequent real estate support policies, with the primary effective policy being to resolve the current supply-demand imbalance by having funds bear losses, thereby easing local debt pressure and creating conditions for the stabilization of real estate companies. With optimistic expectations for achieving a stabilization after a decline, there are expected further policy attempts to be made. Keep an eye on the opportunity for the second round of policy bargaining. Hong Kong stocks include China Resources Land (01109), Greentown China (03900), China Overseas Development (00688), China Resources Mixc (01209), and A-shares may include local state-owned enterprises such as Beijing Urban Construction Investment & Development (600266.SH) and Tande Co.,Ltd. (600665.SH).

Risk warning: Policy effects are below expectations, and micro-level negative feedback continues.