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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 (%)
Source: IMF, June 2011
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
5
Commodity Prices Still on the Upsurge
COMMODITY PRICES
• Commodity prices impact countries
depending on whether they are net
importers or exporters of commodities.
•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
•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.
Source: IMF
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
(%)
Sector-wise GDP Growth
Service sector drives growth
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.
(%)
•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.
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
Repo Rate
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 (%)
Downward cycle
• 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)
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Improved Affordability
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
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