China property market: China’s new mortgage subsidy is likely to disappoint, with benefits concentrated in lower-tier cities and selected tier 2 resale markets

Overview

UBS reviews China’s newly announced residential mortgage interest-subsidy programme and concludes that it is likely to fall below investor expectations because eligibility is capped at a Rmb1.5m home value. The report expects a modest demand effect and selective support for KE Holdings’ tier 2 city resale-transaction business.

Core views

China’s Ministry of Finance, the People’s Bank of China and the National Financial Regulatory Administration announced a residential mortgage subsidy programme on 29 September, effective from 1 October 2026 for an initial one-year period. UBS believes the measure is likely to disappoint investors, chiefly because homes priced above Rmb1.5m are ineligible. The programme applies only to newly originated commercial mortgages for first-home purchases, with gross floor area of no more than 120 square metres and a purchase price of no more than Rmb1.5m. Eligible households receive an annual interest subsidy equal to 1 percentage point of outstanding principal for up to five years. The subsidy applies to at most Rmb1m of mortgage principal, capping the total household benefit at Rmb50,000. Central government bears 90% of the cost and local governments 10%. UBS illustrates the affordability effect using a Rmb1.5m home, a Rmb1m mortgage, a 20-year tenor and a 3.05% mortgage rate. Lifetime interest payments would be Rmb337,000; the maximum Rmb50,000 subsidy therefore covers about 15% of cumulative interest expense but only 2.7% of total homeownership cost, including the purchase price and interest. Holding affordability constant, UBS estimates that this could lift housing demand by roughly 2.7%, indicating a limited aggregate stimulus effect. The institution expects the benefit to be concentrated in lower-tier cities’ new-home markets, where transaction values are more likely to fall under the Rmb1.5m cap, and in tier 2 city existing-home transactions. UBS identifies KE Holdings as the principal listed beneficiary: its non-Lianjia business and part of its tier 2 city Lianjia business are exposed to these resale transactions, which UBS estimates contributed around 20% of KE Holdings’ 2025 profit.

Analysis framework

UBS first assesses the policy’s eligibility rules and subsidy mechanics, then translates the maximum subsidy into interest-expense and total-homeownership-cost savings. It uses the resulting affordability change to estimate demand sensitivity and maps the expected demand effect to city tiers and KE Holdings’ transaction exposure.

Methodology notes

• Industry AnalysisSupply-demand framework

  Affordability-based housing-demand sensitivity analysis

  UBS treats the subsidy as a reduction in homeownership cost and estimates the associated increase in housing demand while holding affordability constant.

• Valuation methods

  PE or P/BV multiples

  UBS states that it values Chinese property developers and managers using PE or P/BV multiples.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• KE Holdings

  Potential beneficiary of higher existing-home transaction activity in tier 2 cities.

  Strengths

  Its non-Lianjia business and some tier 2 city Lianjia business are exposed to the potentially supported transaction segment.

  Weaknesses

  The policy’s overall demand effect is constrained by the Rmb1.5m eligibility cap.

  Risks

  Benefits depend on eligible resale transaction activity in tier 2 cities.

Key data

• Policy effective date1 October 2026Initial implementation period is one year.
• Eligible home-value capRmb1.5mA central reason UBS expects the policy to fall below expectations.
• Maximum eligible mortgage principalRmb1m per householdUsed to calculate the maximum subsidy.
• Maximum cumulative subsidyRmb50,000One percentage point of outstanding principal annually for up to five years.
• Estimated demand uplift~2.7%UBS estimate, holding affordability constant.
• KE Holdings profit exposure~20% of 2025 profit contributionUBS estimate for relevant tier 2 existing-home transaction businesses.

Impact & implications

UBS sees the programme as selective rather than broad-based support for China’s property market. Lower-tier new-home sales and tier 2 resale transactions are the most likely beneficiaries, with KE Holdings positioned to benefit from its relevant existing-home transaction exposure.

Risks

• Government administrative policies could restrict housing demand and mortgage lending.
• Tight financing conditions for Chinese developers could weaken the property market.
• Residential growth in China’s economy could be lower than expected.
• Material policy loosening that drives property sales, investment and prices to positive year-on-year growth would be an upside risk.
• Large-scale developer asset disposals at fair prices could ease liquidity pressure and represent an upside risk.