Category: Real Estate | Page 5

2 November, 2015

RBI needs to answer some questions on home loans

One of the things that young journalists (or even old ones) are taught when they first join a newspaper is to think of a headline first, before they start writing.

The logic for this is pretty straightforward. Newspapers have limited space and pieces written using this concept tend to be more structured and readable.

Given their limited space, newspapers do not have space for rambling (or at least they should not). So all news-reports as well as analysis ideally needs to be definitive, where there is no scope for being all over the place.

The trouble with this approach is that while it helps come up with structured reports as well as analysis, it leaves very little scope for rambling and stuff that is not so definitive.

I know I have been rambling up until now, but just humour me a little more and I might come to the point sometime later in this column.

And actually that’s the beauty of writing on the web. There are no space constraints. This allows writers like me to ramble once in a while and come up with stuff that is not so structured and not so definitive.

This helps, given that life as well as the economy are largely unstructured, not so definitive and a little all over the place. And this is one such column.

Every month, the Reserve Bank of India (RBI) declares the sectoral deployment of credit data. This provides details of the different kind of lending carried out by banks. One of the data points that the RBI shares is the total amount of home loans given by banks.

The latest data was released on October 30, 2015. As per this data, between September 19, 2014 and September 18, 2015, banks gave out home loans worth Rs 1,04,135 crore. This forms 21.6% of the total lending carried out by banks.

How was the situation a year earlier? Between September 20, 2013 and September 19, 2014, banks had given out home loans worth Rs 75,058 crore. This formed around 16.5% of the overall lending by banks.

So what does this tell us? Between September 2014 and September 2015, the banks gave out a greater amount of home loans both in absolute as well as proportionate terms, in comparison to the period between September 2013 and September 2014.

So far so good.

Now compare this to the news that you keep hearing about real estate companies sitting on huge number of unsold homes. If that is the case then how are home loans being given by banks going up?
What this perhaps means is that people are no longer buying under-construction properties (which make up for a significant part of unsold homes of real estate companies) and that is why the number of unsold homes has not been falling.

Instead people are buying completed homes. These are homes which were completed in the past. Investors who had bought these properties are now perhaps exiting. I am not sure about this, but that is the best possible explanation that I can come up with and it’s clearly not definitive.

Why are people buying fully completed homes? For the simple reason that too many under-construction homes over the last few years have continued to be under-construction. A recent report brought out by the business lobby Assocham pointed out on that an average a real estate project in India was delayed by 33 months or close to three years. In this scenario, it will take a real brave-heart to buy an under-construction property.

Further, with banks giving out more home loans, does that mean home prices have fallen, leading to people buying more homes? There is no way this can be figured out from the data as it is currently put out by the RBI.

What the RBI needs to reveal along with the total amount of home loans is the number of home loans as well. If this number is provided then it will become very easy to calculate the average home loan size. This average home loan can then be compared to the average home loan from the previous years and that can give us a good indication of which way home prices are headed.

If home loan size has gone up then we can safely say that prices have gone up as well and vice versa. Further, if the RBI can provide an average loan to value ratio (i.e. the total amount of the home loan divided by the market price of the home being financed), it will give us an even better indication of actual home prices and which way they are headed. One trouble here is that almost all real estate transactions in India have a black money component and there is no way the RBI can estimate that.

Nevertheless, despite this problem, if the RBI gives out the number of home loans along with the loan to value ratio (data which should not be very difficult to agglomerate) it will become slightly easier to make much more definitive statements about the real estate sector in India.

This becomes even more important from the point of view of the fact that there is very little data available on Indian real estate. Most data currently is provided by real estate consultants and they have an incentive in projecting things to be much better than they currently are.

Further, the current real estate indices (the RBI’s All-India Residential Property Price Index and National Housing Bank’s Residex) which give us some indication of which direction the real estate prices are headed, by the time they are published are fairly dated. There is no real time data coming out on Indian real estate which can be used to estimate which way are the real estate prices are headed. And that’s the most basic piece of information needed from any market.

At the same time, the National Housing Bank (which is wholly owned by the RBI) and regulates housing finance companies, should also be putting out similar data. One estimate here suggests that banks give out two-thirds of all home loans and housing finance companies, the remaining. In a country where the entire real estate sector is rigged against the consumer, this will be one consumer friendly move, which will be definitive.

Hope the RBI is listening.

(The column originally appeared on The Daily Reckoning on Nov 2, 2015)

15 October, 2015

Real estate prices are not just about corruption; they are also about affordability

Last week, Suraj Parmar, a leading Thane builder committed suicide. In his suicide note Parmar talked about the corruption in the system. A report in The Indian Express quoted V V Laxminaryan, the joint commissioner of police of Thane, as saying: “The suicide note speaks of several problems that Parmar was facing, including difficulties in obtaining approvals and the stop-work notices issued to him. The note goes on to say that several people were repeatedly demanding bribes, that he had already paid them a lot in the past but that their demands were still continuing and it had become too much for him to deal with.”

Corruption in real estate at the government level has always been an issue. But now if builders are to be believed it has reached never before seen levels. As Niranjan Hiranandani, director of Hiranandani Group told NDTV.com, after Parmar’s suicide: “In the last couple of years, I think corruption is over but extortion has started. So, I think what was unbearable to the builder was the fact that there was no corruption in that sense of the term, but it had gone far beyond corruption levels that have ever happened.”

A June 2011 news-report in The Economic Times gets into the details of the issue. In Maharashtra, which happens to be the biggest real estate market in the country, a builder typically needs around 60 approvals to construct a property. Of this, 50 approvals need to be taken from the municipal corporation where the property is being built.

The Economic Times report then goes on to quote Pune builder Kumar Gera, as saying: “These clearances should not take more than three months…But in most states, it takes anywhere between one year and four years. And they add 20-30 % to a builder’s project cost.”

This is, in turn, passed on to consumers who want to buy homes. As a report in the Daily News and Analysis points out: “At every step, there is a price to be paid to obtain necessary clearances. The ‘Golden Gang’, a group of corporators and civic officials, calls the shots and builders are bound to cough up exorbitant sums to avoid harassment. This expenditure, so to speak, is then passed on to home buyers. That explains why real estate in Mumbai, Thane and Navi Mumbai is so prohibitively expensive.”

In fact, as a real estate consultant told The Economic Times: “Builders don’t just pass it on…They often add to it big time.” So builders add their own corruption premium to the price of homes they sell.

Most builders use corruption in government and increasing input costs to explain that the price of homes won’t fall anytime in the near future. Take the case of cement, a major input into building homes. As a recent newsreport in The Economic Times points out: “Cement prices have jumped 20-40 per cent over the past two months in top cities despite demand from the real estate industry, which is its largest buyer, being low.”

In this scenario the price of homes won’t fall, say builders. But this logic just takes into account the supply side of the equation. It only talks about the builders who supply homes and the costs they have to incur. What about the end consumers who want to buy these homes?

As John Kay writes in an essay titled Guess Who’s Come to Dinner which is a part of the book Everlasting Light Bulbs – How Economics Illuminates the World: “But surely people can’t spend an increasing proportion of their incomes on housing.” The affordability of homes also needs to be taken into account.

Also, owning a house is just not about putting up a down-payment, taking a home loan and paying the builder. There are other costs involved as well. Hence, as Kay puts it, it is important “to focus on the costs of house ownership rather than the cost of houses.”

Given this, affordability isn’t just being able to pay the price of the house. There is more to it than that. As Kay writes: “Mortgage repayments [home loan EMIs basically] are only a…part of the cost of buying a house: you have to pay for repairs and maintenance, heat and light, property taxes.” Then there is the cost of moving in, the cost of setting up the place, and so on.

In a scenario where home prices are anyway high all these costs make the entire cost of owning a home even more expensive. So, the point that builders make about their inability to cut prices doesn’t have any meaning. They can build homes and sell them at prices they think are right, but the question is will there be any takers at that price? And the answer is clearly no.

In any market there are always two sides – demand and supply. And that is a basic point that our builders need to remember. So, they can continue holding on to their prices, but at those prices there will be not much demand for homes. As Kay writes in another essay titled A Fetish for Manufacturing: “The rewards of different activities [are] detached from their position in the hierarchy of needs. You only [get] paid for producing goods that people [want].”

Kay makes another interesting point, which I would like to talk about here. As he writes: “In classic bubbles – from tulip mania to the dot.com frenzy – people bought things, not for their intrinsic worth, but to sell on to others at a higher price. That rarely happens with houses.”

This is not true in the Indian context. Homes in India have “not” always been bought “for their intrinsic worth” but they have also been bought “to sell on to others at a higher price”. And that clearly is not happening anymore. Over the last few years you would have been better off letting your money sit idle in a savings bank account rather than investing in real estate. Given this, the interest in owning real estate has come down. That is clearly visible from the huge number of unsold homes across cities as well as fall in the launch of new projects.

As Kay writes: “As in every asset market, short term price movements are driven by beliefs, not underlying realities.” The underlying reality is that at these prices it does not make any sense to invest in real estate. But the belief that real estate prices always go up is still reasonably strong. The question is for how long will the belief remain strong?

I think we are half way there.

The column originally appeared in The Daily Reckoning on October 15, 2015.

21 September, 2015

Jaitley needs to talk about high home prices, not just high EMIs

Sometimes I think that the finance minister Arun Jaitley has this constant need to talk and in the process he ends up saying stuff which looks rather silly.
Like he said yesterday in Hong Kong: “RBI historically has been a very responsible institution. Now, as somebody who wants India’s economy to grow and who wants domestic demand to grow, I will want the rates to come down…Real estate, for example, can give a big push to India’s growth and this is a sector which is impacted by high policy rates. Therefore, if the policy rates come down over the next year or so, certainly this is one sector which has a huge potential to grow.”

In fact, this is something that Jaitley has said in the past as well. As he said in December 2014: “now time has come with moderate inflation to bring down the rates. If you bring down the rates, people will start borrowing from banks to pay for their flats and houses. The EMIs will go down.”

There is nothing wrong in Jaitley wanting interest rates to come down. Politicians all over the world like lower interest rates because they believe that lower interest rates lead to more borrowing which translates into economic growth. Hence, one really can’t hold that against Jaitley. He was only saying what others of his tribe firmly believe in.

But believing that lower interest rates will lead to the revival of the real estate sector is rather simplistic. The logic here is that since interest rates are high, the EMIs on home loans are high as well. And at higher EMIs people are postponing the home purchase decision.

If interest rates are cut, EMIs on home loans will come down, people will buy homes and this will lead to the revival of the real estate sector. QED.

But as I said earlier in the piece, this reasoning is rather simplistic. Allow me to explain. Every month the Reserve Bank of India puts out sectoral deployment of credit data. This data gives a breakdown of the various sectors banks have loaned money to, including home loans.

Between July 25, 2014, and July 24, 2015, the total amount of home loans given by banks grew by 17.8%. In comparison, the home loans between July 26, 2013 and July 25, 2014, had grown at 17.4%. So, home loans given by banks continue to grow at a very fast pace.

The overall lending by banks between July 2014 and July 2015 grew by 8.2%. Between July 2013 and 2014, the overall lending by banks had grown by 12.6%.

Hence, during the last one year, the growth of overall lending by banks has fallen. Nevertheless, the total amount of home loans given by banks has gone up at a much faster pace of 17.8%, in comparison to 17.4% earlier.

Hence, despite the high interest rates, home loans continue to grow at a fantastic pace. Also, in the last one year, home loans formed around 21.6% of the overall lending carried out by banks. Between July 2013 and July 2014, the number was at 13.2%.

What this clearly tells us is that home loan lending has not slowed down because of high interest rates. It continues to grow at a fast pace. Hence, Jaitley’s logic goes out of the window completely. But how do you explain the fact that the real estate developers are sitting with so many unsold homes?

In a recent research report PropEquity estimated that the “housing sales in the 19 tier II cities fell by 17 per cent as against a 32 per cent decline in the top 14 Tier I cities in the last two years.” Why are home sales falling despite home loans going up?

One of the possible answers is that the number of home loans being given by banks has come down over the years, as property prices have risen at a very rapid rate. This cannot be said with surety given that RBI does not share this data.

The basic problem with Indian real estate is high prices. And unless prices fall, there is no way sales are going to pick up, lower interest rates or not.

It is worth mentioning here that a fall in interest rates does not have a significant impact on EMIs. A home loan of Rs 50 lakh, at an interest rate of 10% and a tenure of 20 years, leads to an EMI of Rs 48,251. At 9.75%, it leads to an EMI of Rs 47,426, which is around Rs 800 lower. The point being that no one is going to buy a home because the EMI is Rs 800 lower.

Also, in order to get a home loan of Rs 50 lakh, the individual interesting in buying a home would need to arrange Rs 12.5 lakh for a down-payment (assuming an optimistic ratio of 80:20). Further, over and above this, some portion of the price will have to be paid in black as well. The question is even in Tier I cities how many people are in a position to spend this kind of money? Not many.

Jaitley needs to realise this. If the real estate sector has to pick up, the government has to go after real estate prices. And Jaitley given that he is so used to saying things, must also start talking about high real estate prices, instead of just high interest rates. That would be a nice change from the usual and will possibly have more impact as well.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on Firstpost on September 21, 2015

8 September, 2015

One idea that real estate companies want to borrow from Gulzar

In the film Ek Thi Dayan, lyricist Gulzar wrote a song, which had the following line: “koi khabar aayi na pasand to end badal denge [if we don’t like some bit of news, we will change the end.]” In the recent past, the real estate companies do not seem to have liked the bad news that has been read out to them. And to tackle that they plan to create their own news. Or at least that is what a recent development suggests.

The Confederation of Real Estate Developers Association of India (CREDAI), a lobby of real estate companies, which has about 10,000 members, now plans to collect its own data on the industry.

As President of CREDAI Geetamber Anand told Business Standard: “The need to come up with its own set of data cropped up after varying figures from real estate consultants including Knight Frank, JLL India, Liases Foras and others, which at times create panic amongst the buyers fraternity.”

A spate of research reports brought out by real estate consultants in the recent past has suggested that real estate developers in large cities are not able to sell homes that they have built. A recent research report by Knight Frank suggested that over 7 lakh homes were unsold in the top eight cities of the country. The report also estimated that it would take more than three years to sell homes that have piled up.

Other real estate consultants have come up with similar reports with similar numbers. This is something which has not gone down well with the real estate lobby, which now wants to put out its own data. How can someone else tell them that all is not well with them?

What has also not gone down well with them is a recent comment by the Reserve Bank of India governor Raghuram Rajan, asking them to bring down prices.

The CREDAI responded to Rajan with the following statement: “While we respect the RBI governors concern for kick starting the real estate sector, it would be prudent to say that from the developers side a substantial reduction in prices has already happened across the country [italics are mine] and any further decrease in sale prices would be a deterrent for the growth of a sector that contributes so much to the economy and employment at large.”

CREDAI President Anand told PTI that “housing prices have gone down by 15-20 per cent on an average in last two years across India, while input costs have risen by 15-20 per cent.” The good bit here is that here is a top real estate lobbyist admitting that prices have fallen. It is tough to get them to admit even this much. Nevertheless, if the reduction in prices has already happened, why there is an inventory of 7 lakh unsold homes across top 8 cities? Also, the total number of unsold homes all across the country would be much higher than 7 lakh, but no such data is complied.

The real estate companies need to go back and learn some basic economics. One of the most basic laws in economics is the law of demand. The law essentially states that there is an inverse relationship between the price of a product and the quantity demand by consumers. If the price of the product goes up, demand falls and if the price of a product falls, the demand goes up.

In case of the real estate sector in India what the law of demand tells us is that if prices had fallen enough, people would have bought homes to live in and the unsold inventory would have cleared out. Nobody likes to let go of a good deal. But that hasn’t happened.

Why? Some simple Maths should explain this. In the National Capital Territory (Delhi and other smaller cities around it) an average flat costs around Rs 75 lakh (most research reports agree on this number). Assuming 20% of the price has to be paid in black (and I am being extremely conservative here), the official price of the flat is Rs 60 lakh (80% of Rs 75 lakh). A bank or a housing finance company gives a loan against this price.

The housing finance company HDFC has a loan to value ratio of 65%. This means it gives 65% of the value of a home as a loan on an average. This would mean that HDFC would give a loan of Rs 39 lakh. The buyer would have make Rs 21 lakh as a down-payment. He also needs to raise another Rs 15 lakh to be paid in black.

Hence, the buyer would need to raise Rs 36 lakh (Rs 21 lakh down-payment and Rs 15 lakh black) on his own. How many people have that capacity even in a city like Delhi? And I am not even taking into account the cost of furnishing the house, the cost of moving into it, other expenses like stamp duty etc.

The same maths works for all other big cities as well. What this clearly tells us is that home prices are way beyond what most people can afford. They are in a bubble zone. The sooner the real estate companies understand this, the better it will be for all of us.

They may want a different end, but that isn’t going to happen. The longer they hold on to prices, the longer they will have to hold on to all the inventory that has piled up.

The column was originally published on Sep 8, 2015 in The Daily Reckoning

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

26 August, 2015

Ms Bhattacharya, teaser rate home loans are a bad idea

Vivek Kaul

The recent suggestion by the State Bank of India (SBI) Chairperson, Arundhati Bhattacharya, to get back teaser rate home loans into the system, has once again sparked the debate over this controversial product. Bhattacharya recently said at an event where the Reserve Bank of India governor Raghuram Rajan was also present: “In fact, the first suggestion that I made (was) that, for a limited period, home loans could be given at below base rate for the already heavy stock of housing.”

In early 2009, SBI had started a teaser home loan scheme at 8%. Bhattacharya went on to add: “Of course, at that time, it was tagged as a ‘teaser’, but, we at SBI, refute that because the due diligence conducted for those loans was same as for others. Even the eligibility (criteria) was same as for regular loans.”

Teaser home loans are essentially home loans in which the interest rate is fixed in the initial years and is lower than the normal floating interest rate on a home loan. The lower interest rate is limited only to the first two-three years after which the loan is priced at the prevailing interest rate on home loans.

For example, the interest rate on a teaser home loan may be fixed at 8% for the first two years, when the prevailing home loan rate is 10%. From the third year onwards, the prevailing interest rate on home loans is charged to the borrower.

The idea with teaser rate home loans is that at lower rates of interest initially, the EMI will also be lower. This will encourage more people to take on a home loan and buy homes. This Bhattacharya feels will help in clearing the inventory of unsold homes that has piled up all over the country. As she said: “Today, the base rate is 9.7%. I am told that real estate inventory is at a two-year high and I was thinking if it is possible for a little while… could something of this (teaser loan) kind be allowed.”

There are multiple problems if anything of this sort were to become a reality. First and foremost, is it the job of the nation’s largest public sector bank to help real estate companies’ clear unsold inventory? From whatever little I have learnt on how banks should operate, the primary objective of a bank is to lend to those who are likely to repay and also, make money in the process, without increasing the overall riskiness of the financial system. Second, why should a bank be allowed to lend below its base rate or the minimum interest rate a bank charges its customers?

Third, if a bank gives out a teaser rate home loan at let’s say 8%, is it making money on that lending? And if it’s not, why is it lending in the first place?
When SBI first started offering teaser rate home loans in February 2009, under the leadership of OP Bhatt, it received criticism from all fronts. Teaser loans were a major reason behind the financial crisis that had started in the United States in September 2008. The difference in the Indian and the American context was that the teaser home loans that SBI was offering, were nowhere as aggressive as the teaser home loans that had been offered in the United States.

In the American context some teaser loans were so structured that only a certain amount of interest had to be paid in the first few years. Hence, the difference between the initial EMI and the actual EMI which kicked in after the “teaser-rate” was over, was huge. Hence, it led to huge defaults. That wasn’t the case in India.

Nevertheless, given the environment in the immediate aftermath of the financial crisis, the teaser home loan did not go down well with the banking regulator. Also, as we shall see, a certain amount of risk did remain in the product. Further, even though, the other lenders such as HDFC, ICICI Bank etc., joined the teaser loan bandwagon and started offering teaser loans, they made it amply clear that they were only responding to competition.

In fact, Deepak Parekh, Chairman of HDFC had called teaser loans a “marketing gimmick”. He had also explained why the product remained risky, even in an Indian context. As he told the Mint newspaper in an interview: “Today what we are saying is, if it’s 8% or 8.25% for the first two years, the rate will be 9% afterwards and so the gap is very little. Suppose interest rates in India shoot up in the next three years, then what will happen? These are all floating rate loans and fixed only for first two years. So, 8% interest will become 12% or even more. Then, the gap will be too much and it’s a problem for the individual home-owners.”

And home loan interest rates did rise eventually in the years to come. There is no data available in the public domain to figure out what was the impact higher interest rates had on those who had taken on a teaser loan.

Further, as Parekh explained: “Financial innovation doesn’t take time; if one does it, everyone copies. It can be done in 24 hours.” If SBI were to launch a teaser rate home loan right now, every other bank would launch a similar product in quick time. This would increase the overall risk in the financial system.

Given all these reasons, teaser loans are a bad idea. And it is surprising that the idea to re-launch them has come from the head of the largest bank in the country. The good news is that it is unlikely that Raghuram Rajan is in the mood to listen to this suggestion. In fact, he made it clear recently to real estate wallahs (real estate companies, lobbies and others associated with the sector) that they should stop asking for lower interest rates every time they open their mouths to speak. He asked them to start cutting prices instead.

As Rajan said: “It would be a “great help” if realty developers sitting on unsold stock bring down prices…Once the prices stabilise, more people will be keen to buy houses…I think we need the market to clear. With growing unsold stock, we need to see the ways to do it. Some of it might be by making loans easier, but we also don’t want to create a situation where prices stay high at the level which means demand can’t pick up.”

Also, as I have said many times in the past, real estate prices are at a level, where slightly lower EMIs really won’t make much of a difference. The real demand for homes to live in will only come in once builders start to cut prices.

The column originally appeared on The Daily Reckoning on Aug 26, 2015