It was reported* on October 9 that the central bank eased quota restrictions on commercial banks’ real estate development lending. On September 30, the central bank’s easing of mortgage policies was stronger than what the market expected (people that already owns a home can enjoy the preferential mortgage policy for first-time home buyers when buying a second home, as long as they have already paid off their previous mortgages). The central bank has eased its policies on both real estate mortgage loans and development loans.

Real estate policy is normalizing. The central bank’s easing of its real estate-related credit policy suggests that the administrative measures introduced since 2H10 to rein in the real estate market are being phased out and real estate policy is beginning to normalize. This will help eliminate market distortions caused by the administrative measures.

Growth in housing sales may stabilize. The central bank’s easing of its mortgage policy is mainly intended to support demand for housing improvement and housing investment demand. In 2012, when the housing market underwent a correction that was similar to the one this year, first-time buyers of improved homes accounted for 33% of housing sales, according to data from Vanke. We expect demand for housing improvement to recover, thanks to the central bank’s easing of mortgage policy, thus lending support to housing sales. As housing prices are still falling without a clear upward trend or upside room, investment demand for housing is unlikely to rebound much even after the policy easing. Overall, the central bank’s easing of mortgage policy will likely have a positive effect on housing sales at the margin and allay concerns about a sharp correction in the housing market.

Real estate-related financial risks and the risk of an economic hard landing have been lowered. The policy easing on real estate development loans shows that the government has become more concerned about developers’ financial difficulties amid the poor housing sales, and that it needs to take action to alleviate risks to the housing market. The relaxation of real estate-related credit policy will provide some support to housing sales and ease developers’ funding strains, lowering the systemic risks posed by real estate and also the risks of an economic hard landing. But the ratio of unsold properties to properties sold remains at historic highs and real estate investment is unlikely to recover much until sales turn around. The normalization of real estate policy may continue and the government may introduce property-related tax breaks or household registration system reform measures to boost the demand for housing.

* http://www.eeo.com.cn/2014/1010/267157.shtml