By Alexander Kenerson and Henry Mariscal

The COVID-19 pandemic reshaped the global economy. Supply chains were dismantled, trade ground to a halt, and overall consumption plummeted, making a global recession inevitable. Faced with the urgent task of restarting their economies, governments around the world made critical policy decisions, choices that continue to shape global markets today. Housing markets, considered a cornerstone of economic stability and growth, have experienced some of the most significant impacts.

An article by the Federal Reserve Bank of Philadelphia explains how U.S. mortgage rates were affected by the COVID pandemic. This article describes how lending boosted as a result of record low interest rates starting in July 2020 that continued through 2021, with much of the lending coming from refinancing. This was unexpected coming out of the pandemic, as the immediate downturn mixed with high unemployment caused expectations of foreclosures similar to the period of the Great Recession. As a result of this hot housing market and abundance of refinancing, home prices quickly increased. In response to this, mortgage rates increased, slowing down the amount of refinancing and slowing the increase of home prices. Overall, this article illustrates how the change in the United States mortgage rate affected refinancing and home prices in the period after 2020 to an extent where the mortgage rate needed to be raised immediately.

In countries around the world, including China and the United States, central banks implemented aggressive expansionary monetary policy to combat the pandemic and increase spending. In the US, interest rates dropped to 0.25% from March 2020 – February 2022, when inflation started to rise sharply. Lower interest rates were followed by a decrease in mortgage rates, seeing unprecedented lows (2% on 30 year fixed rates), resulting in an overheated housing market. Starting in February 2022, mortgage rates climbed quickly and have steadily been clicking in between 6% and 7%.
On the other hand, China’s lowering of interest and mortgage rates, known as the loan prime rate in China (5 year rate), have done the exact opposite of the United States since 2022. China’s loan prime rate didn’t rapidly increase, instead it has continued to steadily decline the past three years and currently stands at just 3.1%.

We study why China and the US, despite being similarly positioned economies, have experienced diverging mortgage rate trends since the start of the COVID pandemic. The US and China are two of the biggest economies in the world with very different governments. These two countries represent two different economic plans, with China having a lot more governmental control in its planned economy, while the United States is a more laissez-faire or free-market oriented economy. We explore how to better understand how each country responds to things they have limited control over, such as COVID, with things they can control such as mortgage rates. Understanding the difference between how these economies respond to crises allows us to see the benefits of each response.

Data Analysis

Figure 1 shows the Consumer Price Index (measure of inflation) vs 30-year fixed mortgage rates in the US since January 2019, a year before COVID. The first eye-catching relationship between the two sets of data is the sharp drop in inflation in the spring of 2020 closely aligned with dropping mortgage rates. When the economy slowed during the early days of the pandemic, the Federal Reserve responded with aggressive expansionary monetary policy to keep things afloat. It slashed interest rates to near zero. The goal was to encourage borrowing and spending by making it cheaper to take out loans. This policy proved to be successful as mortgage rates dropped sharply, with the average 30-year fixed rate hitting a record low of just 2.65% in January 2021.

Figure 1

(Sources: Freddie Mac ; U.S. BUREAU OF LABOR STATISTICS)

In following months, the economy reopened and increased consumer demand led to a surge in inflation, increasing roughly 8% in a little over a year, reaching 9.1% in June, 2022. To combat the high inflation rate, the Fed shifted to contractionary monetary policy, raising interest rates in an effort to discourage spending to cool the economy. As a result, mortgage rates rose alongside, with the average 30-year fixed-rate mortgage reaching 7% by October 2022.

The Fed’s contractionary policy was successful in lowering inflation in the US, as the CPI has fluctuated between 3.4% – 2.4% since June, 2023, a healthy number for growing economies. However, the lower inflation wasn’t followed by a decrease in the mortgage rates, which instead stayed at high rates, making it financially strenuous to enter the housing market.

The Fed is cautious about cutting interest rates too quickly out of concern that doing so could trigger another rise in inflation, potentially worse than before. By keeping rates elevated, the Fed wants to ensure that inflation is firmly under control before easing policy. With the Fed holding interest rates steady and signaling caution, it has become a waiting game for hopeful home buyers, as many are left wondering when, or if, mortgage rates will finally begin to fall back down.

Figure 2 shows the Loan Prime Rate, what China uses to determine mortgage rates, compared with the inflation rate in China since the beginning of 2021. What stands out is how the mortgage rate has consistently declined throughout this period despite inflation changing quite a large amount. In fact, the graph shows that mortgage rates decreased even during a spike in inflation in the middle of 2022. In 2023 and 2024, China experienced very low inflation and deflation. This resulted in a lowering of the interest rate by the People’s Bank of China as seen on the graph combined with other laxer policies such as easing of restrictions on non-local buyers. These policies were intended to decrease household debt burdens while increasing consumer spending.

Figure 2

(Source: Y-Charts)

The current inflation rate in China is concerningly low, as deflation increases the debt burden for those that are borrowing. This means that if deflation is occurring in China, even with low interest rates, households will not be incentivized to borrow. This combination leaves Chinese policymakers with limited options, as mortgage rates are so low that they do not have much ability to increase inflation via monetary policy.

Conclusion

Our research explores the diverging mortgage rate trends between the United States and China in the aftermath of the pandemic. In the US, expansionary monetary policy was initially used to jumpstart the economy, followed by contractionary measures to curb a sharp rise in inflation. While inflation has since stabilized, mortgage and interest rates have remained elevated, largely due to the Fed’s cautious stance against cutting rates too soon and risking another rise of inflation. The high rates have made it increasingly difficult for prospective homebuyers to afford entry into the American housing market. Meanwhile, China’s interest rates have consistently decreased over time, but there has been no need to implement contractionary measures as inflation has mostly decreased over the past few years. This reveals the difference between the two economies in the post-COVID period, America’s decreasing interest rates triggered a huge loaning boom while China’s decreasing interest rates coincided with a deflationary period. In a future project, we might explore how home prices in different regions of China changed during the deflationary period, as this topic could raise compelling economic questions about regional differences in demand, policy responses, and investment behavior in the face of falling prices.

References

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