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Housing Demand in the Context of Global Developments & Rising Inflation Keki Mistry Vice Chairman & CEO HDFC Limited 32nd Meeting of CEOs of Housing Finance Companies National Housing Bank August 30, 2011 Contents Global India Housing • Global Developments • Indian Economy • Impact on Housing 2 More Uncertainty on Global GDP Real GDP Growth (%) 7.4 5.1 GLOBAL OUTLOOK 6.6 6.4 4.3 3 2.8 2.6 2.2 -0.5 2009 4.5 2010 2011(P) 2012(P) -3.4 Emerging Economies World Advanced Economies Source: IMF, June 2011 •Down side risks have increased again • Increased global volatility • Growth in advanced economies are expected to continue to remain weak • Growth in emerging economies is strong, though inflationary pressures are likely to sustain 3 The Downgrade & the Market Bloodbath • August 5, 2011: S&P downgraded the US sovereign rating from AAA to AA+ with a negative outlook – Other rating agencies have chosen to maintain the status quo for US ratings – Since January 2011, other countries downgraded by S&P include Japan, Greece, Portugal and Ireland – US Debt ceiling has been raised 11 times since 2002 – Investors looking for safe assets will continue to buy US Treasuries – Dollar remains a global reserve currency – Flawed ratings were at the heart of the 2008 financial crisis • Market reactions – The downgrade gave investors no information about US’s fiscal situation which the market did not already know, yet markets panicked – Fears of a double dip owing to high unemployment, weak growth, flat consumption and manufacturing, depressed housing starts, falling consumer confidence. – Equity v/s gold 4 Rising Debt to GDP Ratios Public Debt to GDP Japan • Debt has been rising faster than economic 213% output. Greece 157% Italy 129% Ireland 120% Portugal 111% US 100% France 97% UK 89% Germany 87% Spain 74% India 73% China PUBLIC DEBT 18% •EU: Greece, Portugal and Ireland bailed out Spain & Italy: A case of too big to fail but also too big to bail? • US grappling with the problem of future entitlements i.e. public subsidies for social security, healthcare, housing etc. • Need to reduce fiscal spending and raise taxes – but difficult with high unemployment and low growth • Public debt in India is mostly denominated in Indian rupees and is owed to resident agents, hence less likely to be affected by uncertainty in the international debt and currency markets. India is largely a domestic economy. 5 Commodity Prices Still on the Upsurge IMF Index of Primary Commodity Prices in US $ 2005=100 COMMODITY PRICES • Commodity prices impact countries depending on whether they are net importers or exporters of commodities. 300 250 •Average crude oil price in CY so far: US$ 112 per barrel •In FY 2011 India imported 87% of its crude oil requirements • RBI estimates that a 10% increase in oil prices leads to a 0.3% reduction in GDP growth 200 150 100 50 0 2005 2006 2007 2008 2009 2010 Jul-11 Food Metals Source: IMF Agri Raw Materials Petroleum •Surge in prices of precious metals • Gold viewed as a ‘safe haven’ commodity in times of uncertainty • In August 2011, gold touched a record high, crossing US $ 1,900 an oz. 6 Struggling Global Housing Markets Knight Frank Q1, 2011 Global House Price Index key findings: • Global house prices increased by only 1.8% in the year to March, the lowest annual rate of growth recorded since Q4 2009. • House prices in 25 of the 50 countries included in the index remained flat or saw negative growth in the first three months of 2011, compared to only 18 countries a year earlier. • The weakest region was North America which saw a fall of 0.4% in values in the year to Q1 2011. House prices in Europe were static in Q1. • Asia remains the top-performing continent, recording 8.4% growth over the last 12 months. However, this is down from 17.8% a year earlier. • The strongest performing countries were: Hong Kong, where the government is fighting to pull inflationary pressures under control; India and Taiwan. 7 Indian Economy: Strong Fundamentals • India remains the second fastest growing economy after China •India is a domestic consumption driven economy - Consumption accounts for 70% of India’s GDP 10-Year GDP Growth Trend (%) 10.0 8.0 Growth still robust: FY 12 (P): 8% * 8.5 9.5 5.8 6.0 4.0 2.0 8.6 9.3 9.6 7.6 6.8 8.0 8.0 4.4 3.8 0.0 • Services sector contributes close to 60% of GDP • High savings rate at 35% •Middle class expected to rise to 800 mn by 2020 from 250 mn currently •Favourable Demographics – 60% under the age of 30 years (%) 15 Sector-wise GDP Growth Service sector drives growth 10 Agriculture Industry 5 Services 0 FY 09 •Well regulated financial system FY 10 FY 11 FY 12(P) 8 * Source: RBI Annual Report, 2010-11 Inflation: India’s Bugbear • Inflation remains the key macro-economic risk and challenge. •Inflation has been above the 9% mark for 8 consecutive months. Y-o-Y WPI Average % 10 Year Trend (%) 10 8 8 •Initially inflation was driven by supply side constraints in agricultural commodities, but has now spilled to manufacturing and has become more broad-based. •WPI stood at 9.2% in July 2011 compared to 9.4% in the previous month. •Outlook: WPI unlikely to subside till September 2011 owing to higher minimum support prices for agricultural products and impact of the second round of fuel price increases. • Commodity prices could come off if global growth remains weak. 6.5 7.1 6.5 5.5 6 4 2 9 8.6 3.6 3.4 4.4 4.8 3.6 0 FY 12: Citi projections Average headline inflation for FY 12 is likely to be ~8.5 to 9% -- higher than RBI’s revised target of 7%. 9 Higher Interest Rates Won’t Wish Away the Inflation Problem How Rates Have Moved… Overnight MIBOR 1 yr G-Sec 5 yr G-Sec 10-yr G-Sec I yr AAA Corp Bond 5 yr AAA Corp Bond 10 yr AAA Corp Bond Current* 1 year 8.04 8.15 8.24 8.27 9.36 9.38 9.38 % ago 5.20 6.50 7.82 8.13 7.80 8.54 8.78 11 Repo Rate increases since March 2010 i.e. 300 bps increase 10% Repo Rate 8% 8% 6% 5% 4% 2% 0% Bank Base Rates are currently between 10 to 10.75% compared to 7.5 to 8% a year ago. • Credit off take showing signs of slowdown • Liquidity is still there • Supply bottlenecks need to be addressed • Will RBI pause on a further rate hike increase in September 2011? •As at August 25, 2011, Source: FIMMDA 10 Rising Inflation & Interest Rates: Impact on Housing • There is a general notion that rising interest rates and inflation – Leads to a slowdown in growth of housing finance; and – Deterioration of asset quality • This need not be the case if: – Credit appraisals are done prudently – Borrower has sufficient equity in the property – Loan repayments are structured where the principal component of the loan starts gets repaid immediately (unlike interest only loans) – Impact of rising interest rates on EMIs are minimised since incomes of most borrowers tend to increase over time 11 Housing Loans & Interest Rate Cycles Interest Rate (%) 13.00 12.00 12.50 Downward cycle Upward cycle 12.50 10.75 11.00 10.00 8.75 9.00 8.00 7.00 8.25 Indicative Home Loan Rates • A floating rate housing loan is a long-term loan and over this period, there will be various interest rates cycles. • A genuine home buyer will not defer his decision to purchase a home based only on interest rates. They are more sensitive to changes in real estate prices and their own levels of confidence. • Indians are generally debt averse and prefer to prepay, irrespective of interest rate cycles. 12 Demand for Housing will remain Robust in the Long Run • High demand growth driven by: – Improved Affordability • Rising disposable income • Tax incentives (interest and principal repayments deductible) – Increasing Urbanisation • Currently only 31% of Indian population is urban • Urbanisation expected to increase to 40% by 2030 – Favorable Demographics • 60% of India’s population is below 30 years of age • Rapid rise in new households • Low penetration • Housing shortage estimated at 24.7 million units – Rural:14.1 million units, Urban:10.6 million units (Census Report) 13 45 9.00 40 8.00 35 7.00 30 6.00 22.0 25 5.00 15.6 20 4.00 11.1 15 3.00 8.3 10 6.6 5.9 5.3 5.1 4.7 4.3 4.7 5.0 5.1 5.1 4.5 4.7 4.8 2.00 5 1.00 0 0.00 Property Cost (Rs Lac) Affordability Annual Income (Rs Lac) Property Value (Rs Lac) & Affordability Improved Affordability Annual Income (Rs Lac) 1 Lac = 1,00,000 Representation of property price estimates Affordability equals property prices by annual income 14 Low Penetration Implies Room For Growth MORTGAGES AS A % OF GDP 120% 104% 100% 88% 81% 80% 60% 48% 39% 40% 17% 20% 20% 26% 29% 41% 32% 9% 0% Source: European Mortgage Federation, 2009, World Bank, 2008 & BCG Banking Report, 2010 15 Issues for Consideration • Need for more affordable housing projects rather than high-end luxury projects – Developers need incentives to encourage affordable housing projects, such as single window clearances for such projects • Welcome step by NHB to examine LTVs and capital requirements – Risk weights should be lower as LTV goes down due to loan repayment – Will provide capital relief to lenders • NHB may consider – Exemption for HFCs for XBLR filing – Priority sector lending – indirect finance to be increased to Rs. 25 lakhs from Rs. 5 lakhs 16 Housing Finance in an Environment of Uncertainty • Volatility and uncertainty to continue in the global economy and India cannot be insulated • Demand for housing loans to sustain in the long run • No substitute for prudent lending norms • Avoid asset liability mismatches 17 Thank you