The recent surge in mortgage interest rates has sent shockwaves throughout the housing market, catching many potential homebuyers off guardJust not too long ago, rates were being lowered, prompting a slew of inquiries among friends and colleagues about whether it was the right time to invest in real estateHowever, in a strange and somewhat frustrating twist of fate, those same rates have now climbed back up, leaving many to wonder: Is there a renewed demand for housing that justifies these price hikes?

Recent developments across various cities—including Suzhou, Guangzhou, and Nanjing—saw institutions cancelling mortgage rates below 2.9% and adjusting them to as high as 3.0%. This trend hasn’t been limited to major metropolises; even the first-time homebuyer mortgage rates in smaller third and fourth-tier cities are now hovering around 3.1% or higherTo put things into perspective, within a month, Suzhou has seen interest rates jump from 2.9% and then 2.95% all the way back to 3%, while neighboring cities like Yancheng and Yangzhou have already breached the 3.0% mark.

This sudden spike in mortgage rates has spawned a narrative among real estate sales strategies that frames it as “the bottom” being reached: a tactic aimed at persuading potential buyers to make timely decisions

The unsettling question lingers: Are these rates genuinely at their lowest?

While it’s easy to succumb to panic amidst rising interest rates, it’s essential to take a long-term view of the situationBeginning with the reforms of the Loan Prime Rate (LPR) in 2019, China’s central financial authorities established a minimum standard for mortgage ratesThis served as a benchmark for the market, compelling banks to conform strictly to these guidelines, typically keeping rates around 20 basis points below the LPRHowever, inconsistencies arose—while the LPR saw a downward trend, many cities maintained static execution rates, leading to an actual increase in the additional points borrowers were chargedA case in point is Hefei, where the mortgage rate stayed fixed at 5.88% throughout 2020-2021, even as the LPR dropped.

As 2022 rolled around, the nominal property price began to shift, entering a phase of decline which triggered a cascade of policies aimed at stimulating the market

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Authorities took note of the widening disconnect between regulatory measures and actual market conditionsConsequently, in cities where there’s been consistent month-over-month and year-over-year depreciation in housing prices, some local governments began to implement maximum mortgage rates that broke previously imposed lower boundariesAn example can be found in Zhengzhou, where at the time, the LPR was approximately 4.3%, suggesting a policy floor at 4.1%. Still, it was one of the first cities where mortgage rates dipped into the low 3% range.

This year, as property prices continued their downward trajectory, the People’s Bank of China decided to lift restrictions, allowing local governments to set their own minimum mortgage rates or establish market-driven pricingThis resulted in an observable decline in mortgage rates; in Guangzhou, for instance, rates plummeted below 3%. In several regions of Jiangsu, there were even instances of housing provident fund loan rates falling below those of commercial lending—an unusual occurrence

Professionals within the finance sector noted that maintaining a mortgage rate of around 3.2% is essential for breaking even, indicating that if rates drop too low, it would jeopardize the sustainability of the provident housing fund itself.

The broader implications of a backward situation—where conventional mortgage rates lower than provident loan rates exist—challenge both foundational welfare principles and undermine the credit guarantee properties that existShould the advantages of provident fund loans diminish, homebuyers would pivot towards commercial loans, advertising a subsequent decline in the deposit amounts for these fundsThis could spark a profound wave of consequences, including premature repayments and refinancing behaviors that could eventually dilute the basic purpose of the fund.

Yet, with many cities effectively practicing lower limits at 3% to 3.1%, the spread on new mortgage loans dips unfavorably, making it impossible to meet the criteria for adjusting existing loan rates

While rising rates might inhibit some potential buyers from executing their housing plans, the continuance of these shifts may affect overall housing prices—potentially prolonging their declineEven with forecasts suggesting that prices will stabilize by 2026, short-term market forces currently indicate a downward trend.

Additionally, commercial banks have been grappling with their net interest margins that fell to an alarming 1.54% in the first half of this year, an unfavorable turn of events reflecting a decline of 19 basis points from the previous yearThis figure stands significantly below the alert threshold of 1.8%, highlighting the pressing squeeze on banking profits stemming from excessively aggressive interest cutsAs uncertainties loom over whether housing prices have bottomed out or not, systemic risks to banks could amplify challenges if the situation remains unresolved