CMSC: Further reduction in mortgage interest rates will help propel the bottoming out of total demand for new and second-hand homes.

CMSC released a research report stating that the difference between the net rental yield and the mortgage interest rate in China's first-tier cities is 69-146 basis points (BP), with the difference potentially smaller in second and third-tier cities. It is predicted that further decreases in mortgage interest rates will help stabilize the total demand for new and existing homes. Lowering mortgage interest rates not only helps stabilize the overall housing demand but also reduces the number of trend trading listings on the supply side, thus improving the supply-demand relationship and providing investors with a clearer expectation of when house prices will stabilize. The key points from CMSC are as follows: Since September 24th, with further relaxation in real estate policies such as the reduction of restrictions in some cities, lowering of minimum down payments and mortgage rates, adjustments to value-added and deed taxes, optimizing policies related to purchasing commercial housing, and proposing land acquisition policies, there has been some improvement in resident expectations, and the market fundamentals have improved. Currently, the fundamentals show a characteristic of "strong demand and supply in high-energy-level cities, and weakening demand and supply in low-energy-level cities." In addition to recent external impacts such as the United States proposing "equal tariffs," the fundamentals of the real estate market and the next steps in real estate policies are areas of current focus. The organization believes that short-term policy focuses may include the implementation of past policies and the possibility of further interest rate cuts at the financial level. Possible paths for lowering mortgage interest rates? The potential paths for lowering mortgage interest rates may include: (1) lowering the provident fund interest rate to create space for commercial loan interest rate reductions, and (2) timely pushing for a decrease in the 5-year Loan Prime Rate (LPR). Regarding the provident fund interest rate: in the past, with the decrease in the 5-year LPR and the cancellation of the policy floor for mortgage rates, commercial loan rates have gradually decreased. However, looking at the actual first-home credit rates (commercial loan rates) granted in 50 cities, the rates hit a low of 3.06% in October 2024. During this low point, the difference between the first-home credit rate (3.06%) and the corresponding 5-year provident fund rate (2.85%) was only 21 BP. Subsequently, the first-home credit rate saw a slight rebound from the low point in October 2024 to 3.11% in January 2025, with some cities experiencing even greater increases. This rebound may be influenced by the provident fund rate, which has a public welfare nature. Previously, the "Boosting Consumer Special Action Plan" issued by the General Office of the CPC Central Committee and the General Office of the State Council mentioned "reducing the housing provident fund loan interest rates in a timely manner." A decrease in the provident fund rate may create room for a reduction in commercial loan rates. Regarding the 5-year LPR: previous statements such as "implementing moderately loose monetary policies" and "timely lowering reserve ratios and interest rates to maintain ample liquidity" have been proposed in the Central Economic Work Conference and the government work report. Under the loose monetary policy as well as external factors like the recent proposal of "equal tariffs" by the United States, attention may be focused on the possibility and timetable for further reductions in the 5-year LPR. What is the impact of lowering mortgage interest rates on real estate sales volume? From overseas experience, it is believed that narrowing the difference between net rental yield and mortgage interest rates can help stabilize total housing demand (new and existing homes). Observing the net rental yield and mortgage rates in key cities like New York and Washington D.C. following the subprime crisis in 2009, when the net rental yield and mortgage rates reached equilibrium, housing prices had dropped by 20%, leading to an increase in the net rental yield from 2.5%-3.0% to 4.5%-5.0% (an increase of around 200 BP) and a decrease in mortgage rates from 6.8% to 5.1% (a decrease of 170 BP). The gap between the two had narrowed from around -370 BP to zero. In terms of finance, this set a foundation for stabilizing total housing demand (new and existing homes). The current difference between the net rental yield and mortgage rates in China's first-tier cities is 69-146 BP, with potentially smaller differences in second and third-tier cities. CMSC previously stated in its annual strategic report that as credit fundamentals at the corporate end gradually become clearer, further decreases in loan rates will lead to a further narrowing of the gap between the net rental yield and mortgage rates, thus stabilizing the total demand for new and existing homes. High-energy-level cities, due to the scarcity of public resources, may be able to stabilize overall housing demand while maintaining a certain difference between net rental yield and mortgage rates, suggesting that premium prices could be present in high-energy-level cities. Quantitatively, after the 5-year LPR was lowered, there were above-seasonal growth in the monthly sales area of commercial housing in the following month and beyond. The larger the decrease in the LPR, the higher the growth in the seasonal-adjusted sales area of commercial housing. Looking at the sales performance of commercial housing after the 10 previous decreases in the 5-year LPR, if the LPR was lowered by 5/10/15/20/25 BP, the median growth in the seasonal-adjusted sales area in the decreased month would be 0.0%/2.0%/4.0%/6.0%/8.0%, while in the subsequent month it would be 0.0%/0.3%/0.7%/1.0%/1.4%. How does the lowering of mortgage interest rates affect supply-demand relationships and stock prices? In addition to helping stabilize overall housing demand, the decrease in mortgage interest rates also reduces the number of speculative listings on the supply side, thus jointly improving the supply-demand relationship and providing investors with a clearer expectation of when house prices will stabilize. In terms of listing structures, they can generally be divided into two categories: listings sold passively due to family asset-liability situations or liquidity reasons, and "trend trading" listings formed based on future price expectations. The decrease in mortgage interest rates may reduce the number of "trend trading" listings and improve the supply-demand relationship. This can help investors anticipate when house prices will stabilize.The clearer timetable for establishing expectations drives the valuation repair of the real estate sector, and the entire A-share market's industries and consumer sectors related to real estate may also receive significant valuation repair.From a configuration perspective, CMSC still maintains the relative and absolute two real estate allocation strategies put forward in the previous viewpoint report: from a relative perspective, investors need to not only choose stocks with high growth expectations, but also find a balance in valuation. Mainstream real estate stocks generally have limited downside valuation but significant upside potential targets, such as targets with dividend protection and valuation boost from the turnaround of distressed companies; from an absolute perspective, as the "credit bottom" on the corporate end becomes clearer, if the valuation falls significantly below 1x PB after considering potential impairment pressure adjustments, the stock may become investment-worthy. At the target level, focus on high-quality turnover companies with a history of stable "continuous internal cash flow creation" records and companies with a more regionally focused approach, especially under the "dumbbell strategy" focusing on high dividend yield, relatively stable performance companies, and companies with valuation recovery opportunities as market debt repayment pressures decrease. Risk warning: Mortgage loan rate reduction progress is slower than expected, real estate sales are lower than expected, and the improvement process of supply-demand relationship is slower than expected, etc.