The central government is encouraging home buyers to use mortgages from public housing funds, as regulators tighten controls on loans from commercial banks.

The Ministry of Construction yesterday announced that a mortgage with a maturity of more than five years will continue to carry an annual interest rate of 4.59 per cent.

Meanwhile, the minimum mortgage rate from commercial banks is now 5.81 per cent following Friday's hike by the People's Bank of China.

To curb China's frenzied investment, the central bank raised interest rates for the second time this year and the hike will see commercial banks' one-year benchmark deposit and lending rates raised by 0.27 of a percentage point to 2.52 per cent and 6.12 per cent respectively.

However, the deposit rate in the public housing fund has been increased from 1.71 per cent to 1.80 per cent as of Saturday to encourage homebuyers to save more.

Homebuyers are required to contribute 5-12 per cent of their salary to the public housing fund, and their employers are required to deposit the same amount.

The property interest rate change came after China Banking Regulatory Commission (CBRC) called on banks and other financial institutions to tighten their property lending management last Wednesday.

It expressed concern about the possible huge credit risks in the sector, which many say is overheating with nearly 24.2 per cent growth during the first six months.

"The interest rate hike is another warning to property developers and commercial banks," said Xie Guozhong, chief economist of Morgan Stanley in Asia. "It will increase costs in real estate development and shows the government's determination to cool down the market."

Insiders said more homebuyers will choose mortgage loans from public housing funds instead of commercial banks, and this may lead to property developers feeling the pinch from capital shortage.

Zhao Zhuowen, general manger of Guangzhou-based Tongchuangzhuoyue Real Estate Company, said the application process for a public housing fund mortgage takes at least one month longer than the application from commercial banks, meaning a delay in payment for developers.

"If more and more buyers choose to do so, this will become a challenge for developers as they have already been tested by the interest rate hike," said Zhao.

"It's important to curb frenzied development as some may leave the market when the financial burden increases."

With the government taking measures to cool down the heated market, buyers are taking a "wait and see" approach in case property prices decrease.

Zhao said in Guangzhou the number of transactions in July has decreased 40 per cent compared with June.

"But that doesn't necessarily mean a price hike in the future unless the government offers more low cost housing," said Zhao.

However, demand and government encouragement for low cost housing is not translating into action by developers.

Investment in low cost housing increased 5.7 per cent year-on-year to 27.5 billion yuan (US$3.4 billion) in July.

Total investment in the property sector reached 941.1 billion yuan (US$117.6 billion), according to the National Bureau of Statistics (NBS).

Editor: Yan