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Housing Demand in the Context of Global Developments

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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 – PowerPoint PPT presentation

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Title: Housing Demand in the Context of Global Developments


1
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
2
Contents
3
More Uncertainty on Global GDP
4
The Downgrade the Market Bloodbath
  • August 5, 2011 SP 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
    SP 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
    USs 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

5
Rising Debt to GDP Ratios
6
Commodity Prices Still on the Upsurge
7
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.

8
Indian Economy Strong Fundamentals
Source RBI Annual Report, 2010-11
9
Inflation Indias 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
10
Higher Interest Rates Wont Wish Away the
Inflation Problem
  Current 1 year ago
Overnight MIBOR 8.04 5.20
1 yr G-Sec 8.15 6.50
5 yr G-Sec 8.24 7.82
10-yr G-Sec 8.27 8.13
I yr AAA Corp Bond 9.36 7.80
5 yr AAA Corp Bond 9.38 8.54
10 yr AAA Corp Bond 9.38 8.78
Repo Rate
  • As at August 25, 2011, Source FIMMDA

11
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

12
Housing Loans Interest Rate Cycles
  • 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.

13
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 Indias population is below 30 years of
    age
  • Rapid rise in new households
  • Low penetration
  • Housing shortage estimated at 24.7 million units
  • Rural14.1 million units, Urban10.6 million
    units (Census Report)

14
Improved Affordability
1 Lac 1,00,000
Representation of property price estimates
Affordability equals property prices by annual
income
15
Low Penetration Implies Room For Growth
MORTGAGES AS A OF GDP
Source European Mortgage Federation, 2009, World
Bank, 2008 BCG Banking Report, 2010
16
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

17
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

18
Thank you
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