**Editorial Commentary**
To better fulfill its role in providing a safety net and to meet the housing needs of more families, it’s crucial to consider public sentiment regarding the adjustment of housing provident fund loan interest rates.
Is it true that commercial mortgage rates are lower than those for provident fund loans?
Recent adjustments in the Loan Prime Rate (LPR) have led to a significant decline in commercial mortgage rates across the country. However, these rapid changes in market rates have brought unexpected challenges, particularly the emerging phenomenon where commercial loan rates are lower than those of housing provident fund loans.
According to reports from Southern Metropolis Daily, several banks in Guangzhou have received requests to ensure that commercial mortgage rates do not fall below those of provident fund loans. Some banking insiders have previously indicated that the rates for first-time homebuyers’ commercial loans have dipped below the provident fund rates, reaching as low as 2.7%. Following the People’s Bank of China’s announcement to lower the personal provident fund loan rate by 0.25 percentage points on May 18, 2024, the interest rate for first-time homebuyers has been adjusted to 2.85% for loans over five years.
In contrast, some regions have indeed seen commercial loan rates drop below provident fund rates, making it more economically viable for first-time buyers to opt for commercial loans over provident fund loans. To better serve its intended purpose as a safety net and to accommodate more families’ housing needs, it may be beneficial for housing provident fund loan rates to be adjusted in line with market trends.
Unlike commercial bank loan rates, which are closely tied to the highly market-driven LPR, provident fund loan rates remain linked to a benchmark rate. The last adjustment to the provident fund rate occurred in May of this year, aiming to reduce the burden on homebuyers and enhance the appeal of the provident fund loans. However, as LPR continues to decline, the provident fund loan rates have remained stagnant, leading to this growing inversion.
This inversion undoubtedly affects the attractiveness of the provident fund loans. If it persists, the liquidity of the provident fund could be jeopardized, posing risks to its sustainable development. The territorial management of these funds means that local provident fund management departments are confronting liquidity risks head-on, which may explain the underlying motivations for the “mandatory requirements” observed in some areas.
Examining the provident fund itself, it is designed as a safeguarding mechanism that aims to support low- to middle-income families in purchasing homes through low-interest loans. The current inversion clearly contradicts this intent, undermining market rate adjustments and restricting borrowers’ options while preventing the provident fund from performing its essential role.
Given these circumstances, it is necessary to accelerate adjustments to the provident fund loan rates. Market expectations had anticipated adjustments to the benchmark rates before the occurrence of the rate inversion. However, since changes to provident fund loan rates involve multiple layers of governance, the independence of local provident fund management centers and their region-specific management complicate the process, making unified adjustments less frequent and more challenging.
In the medium to long term, aligning provident fund rates with market movements is an inevitable trend. With a suite of policy measures being introduced to stabilize growth, the decline in LPR aligns with broader macroeconomic strategies. Consequently, a reduction in provident fund loan rates is a logical outcome.
While the provident fund was established with social security in mind, it can still benefit from flexible adjustment mechanisms, streamlined approval processes, enhanced cross-departmental collaboration, increased transparency, and strengthened oversight and evaluation to better utilize the housing provident fund system, promoting stable and healthy development in the real estate market.
Housing prices have long been a significant concern for the public, especially in major cities where high costs have made homeownership unaffordable for many low- to middle-income families. The housing provident fund system provides these families with a relatively low-cost financing option, easing their purchasing pressure and increasing their consumption potential.
With rational policy adjustments, we believe the housing provident fund system can better fulfill its protective role, stimulate healthy real estate market development, and benefit a broader population. As China’s financial system reform progresses, the housing provident fund loan rate mechanism will become increasingly refined, providing robust support for achieving the societal goal of “adequate housing for all.”
