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Will home loans be the next big worry for banks?

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Vivek Kaul

I am amazed at the strong belief that people have that real estate prices will never fall. Every time I write a column on real estate readers get back to me with newer theories on why I am wrong. A new theory that was put forward(actually it is not so new, just that no one had come back to me with this theory for a while) to me on Twitter was that the government won’t allow real estate prices to fall.

To this another Twitter follower replied by saying that if real estate prices can fall in China(where the government is far bigger and has a lot more control over things than in India) then they can fall in India as well. Guess that is a fair point.

Anyway, this column is really not about why real estate prices will fall (in fact they have already started to fall). That bit I am already convinced about, I just need to keep reiterating it for the benefits of the believers who don’t see it coming.

What I am worried about is what will happen in the aftermath of home prices falling. Banks clearly have a reason to worry. And here is why.

Every month the Reserve Bank of India (RBI) puts out data regarding the sectoral deployment of credit by scheduled commercial banks operating in the country. For a period of one year ending May 29, 2015, the total lending by banks grew by 8.5% to Rs 61,51,600 crore. During the same period, the total amount of home loans given by banks grew by  17.1% to Rs 6,48,400 crore.

Now compare this to what happened during the period of one year ending May 30, 2014. The overall bank lending had grown by 12.7% to Rs 56,684,00 crore. In comparison the total amount of home loan given out by banks had grown at a similar 17% to Rs 5,53,800 crore.

If we go back a year further to May end 2013, the overall growth in bank lending had stood at 15.3% whereas home loans grew by 18.4%. (Actually the period here is a little more than a year, between May 18, 2012 and May 31, 2013).

What this clearly tells us is that even though the overall growth of lending by banks has considerably slowed down, the growth in home loan lending continues at almost the same pace. What conclusion can be draw here? The RBI does not give out the total number of home loans that banks are giving out. Neither does it tell us the average size of a home loan.

Nevertheless, one explanation for home loans continuing to grow can be that the increase in the price of homes has also led to the increase in the average size of home loans.

What happens if we look at the data a little differently? Over the one year period ending May 29, 2015, the total lending of Indian banks grew by Rs 4,83,210 crore. During the same period the total amount of home loans grew by Rs 94,590 crore. Hence, home loans constituted around 19.6% of bank lending during the last one year.

What was the scene a year back? For the one year period ending May 30, 2014, the total lending of Indian banks grew by Rs 6,40,570 crore. Home loans had grown by Rs 80,260 crore during the same period. Hence, home loans constituted 12.5% of the lending during the course of the period.

For the period of one year ending May 31, 2013, home loans constituted around 11% of the overall lending by banks. (As mentioned earlier, the period here was a little more than a year, between May 18, 2012 and May 31, 2013).

Now what does this tell us? With overall bank lending slowing down, banks have increasingly become dependent on home loans. As Deepak Shenoy of Capital Mind puts it: “the demand for housing loans is pretty much the only game in town for the banks.”

Home loans were formed 11% of the total loans given out during the period of one year ending May 2013. This number jumped to 12.5% during the period of one year ending May 2014. And for the period of one year ending May 2015, home loans amounted to 19.6% of the overall portfolio. Things get even more complicated once we look at the divide between priority sector home loans and other home loans. Home loans of up to Rs 25 lakh get categorised as priority sector loans.

For the period of one year ending May 29, 2015, priority sector home loans grew by just 4.9%. On the other hand home loans of value greater than Rs 25 lakh grew by 32.2%. Hence, higher value home loans are growing at a significantly faster rate. For the period of one year ending May 30, 2014, priority sector home loans had grown by a much faster 8.7%. The home loans greater than Rs 25 lakh had grown by around 29.1%.

The problem is that with the real estate bubble starting to loose fizz banks are likely to face the next spate of bad loans from the home loans that they have given out. I might be jumping the gun here a little, but the numbers show an increasing dependence of banks on home loans and that is clearly not a good sign.

As the analysts Saurabh Mukherjea and Sumit Shekhar of Ambit write in a recent research report titled  Real Estate: The unwind and its side effects: “Over the last decade, the combined real estate portfolios of banks and NBFCs have increased at a CAGR[compounded annual growth rate] of ~20%. A breakup of this growth between value and volume shows that two-thirds of this growth has been driven by increased ticket sizes (due to the continued increase in ticket sizes), and volume growth for the sector has been relatively modest at ~8-9% CAGR over the last 10 years.”

This is going to change in the days to come. As Mukherjea and Shekhar write: “Housing finance companies/banks would be an obvious casualty if real estate prices correct.”

Disclosure: The idea for writing this column came after reading Capital Mind’s research report titled Bank NPAs Show Alarming Signs, Add to Woes of the Sector

The column originally appeared on The Daily Reckoning on July 24, 2015

Despite rising number of unsold homes, real estate prices continue to rise

The Confederation of real estate developers association of India (CREDAI) a real estate lobby, has written to the government to provide relief to the real estate sector in the upcoming budget which is scheduled towards the end of this month.
“We want infrastructure status for real estate apart from that there should be exemption from the tax and less formalities to obtain home loans for the buyers,” a CREDAI official told the Times News Network.
These moves, the lobby believes, will provide the sector some “cheer”.
Before this, CREDAI had constantly been talking about the need for the Reserve Bank of India(RBI) to cut the repo rate or the rate at which it lends to banks. Raj Modi, president of CREDAI in the National Capital Region had said in January 2015 : “We have been raising the concerns of developers over higher rates from the government. We are happy that RBI has taken a step by cutting the rates. We expect that this will encourage banks to ease their home loan rates…This will help developers to expedite their projects which were otherwise facing fund crunch. Home buyers’ dreams of owning a home would also get a boost as we expect an accelerated purchase cycle.”
This comment came after the RBI decided to cut the repo rate by 25 basis points to 7.75%:
The position taken by CREDAI till date seems to be that people are not buying homes because interest rates are high. If RBI starts cutting the repo rate it will lead to banks cutting the interest rate they charge on their home loans. People will borrow and buy homes. And everybody will live happily ever after. 
Only if things were as straightforward as that. I have explained in the past that the major reason why Indians are not buying as many homes as they were in the past is because prices are too high in comparison to the income of people. Further, despite slowing sales, most real estate companies and builders have not budged and refused to cut prices.
This becomes clear through the research report titled India Residential Market Preview for the period October to December 2014, released by Liases Foras, a real estate research and rating company. The research report provides data for six cities (Mumbai Metropolitan Region, National Capital Region, Chennai, Bangalore, Hyderabad and Pune).
The report clearly shows that sales continue to remain slow as the total number of unsold homes pile up. “The unsold stock rose 17% from 709 mn SqL in Dec 13 (Oct to Dec 2013) to 832 mn SqL in Dec 14 (Oct to Dec 2014),” the report points out. Yearly sales across the six cities that the report covers declined by 1.1%.
Despite huge number of unsold homes and falling sales, home prices continued to rise, though not at the same pace as they have in the past (as can be seen from the accompanying table). 

City

Weighted Average Price of a Flat in Oct to Dec 2013

Weighted Average Price of a Flat in Oct to Dec 2014

% increase in price

Months of unsold inventory as on Dec 2014

Months of unsold inventory as on Dec 2013

Mumbai Metropolitan Region

Rs 1.23 crore

Rs1.32 crore

6.62%

40

48

National Capital Region

Rs 73.09 lakh

Rs 74.79 lakh

2.33%

40

56

Bangalore

Rs 85.21 lakh

Rs 85.55 lakh

0.40%

17

35

Chennai

Rs 61.57 lakh

Rs 63.37 lakh

2.92%

22

41

Pune

Rs 55.84 lakh

Rs 56.94 lakh

1.96%

21

15

Hyderabad

Rs 70.51 lakh

Rs 74.77 lakh

6.05%

31

24

Source: Liases Foras


A glance through the column in the table which lists the weighted average price of a flat across various cities, makes it clear how homes have become totally unaffordable across the length and breadth of India. And this is where the problem lies. 
Other data also clearly shows this unaffordability of homes across India. Take a look at the following table from the National Housing Bank. It shows the breakdown of home loans given by housing finance companies for buying old homes. 

Source: National Housing Bank

As is clear from the above table more than half of the total loans given by housing finance companies have been given to homes worth more than Rs 25 lakh. The data for 2014 is not available. Nevertheless, there is not much reason to believe that the situation would have changed much from what it was in 2013. 
The following table shows a breakdown of home loans given by housing finance companies towards the buying of homes (both old and new). 

Source: National Housing Bank


The above table shows that more than 47% of all home loans given by housing finance companies were for homes above Rs 25 lakh. This number has jumped dramatically since 2012, when it was at 43%. It also needs to be pointed out that at Rs 25 lakh it would be next to impossible to buy anything half decent in the six cities that Liases Foras tracks. It would be interesting to know, what portion of the total home loans is made of home loans over Rs 50 lakh. 
Hence, homes are so expensive that it has led to a situation where the share of housing as a proportion of the Indian GDP is very small. As can be seen from the following table, the only countries that are behind us when it comes to housing are Bangladesh, Sri Lanka and Pakistan. 

Source: National Housing Bank


Hence, affordability is the major issue when it comes to real estate. As the Report on Trend and Progress of Housing in India 2013 points out: “This phenomenon[i.e. affordability] has the potential to exclude a large segment of the society as they get priced out of the formal housing finance market…It continues to remain the most critical aspect of housing for a vast segment of the population.” 
Interestingly, the Technical Group of Housing Shortage estimates that the housing shortage in urban India was at 18.78 million in 2012. In rural India the number was at 43.9 million. 
What this clearly tells us is that India’s real estate companies and builders have been building homes for only a a very small segment of the population. And even this segment is now not in a position to buy the homes that are being build, given the price that they are being sold at. 
It is time the real estate sector woke up to this opportunity. The government also needs to address this, by rapidly addressing supply side issues like archaic building bye-laws, delays in project approvals etc. At the same time it also needs to figure out how to drive down high land costs. And on top of everything, it needs to figure out how to tackle the massive amount of black money that the sector attracts. 

The column originally appeared on www.equitymaster.com as a part of The Daily Reckoning on February 9, 2015

Why an increase in tax break won’t make people buy more homes

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Vivek Kaul
It is time of the year when tax saving stories start to make it to the front page of newspapers, as the finance minister gets ready to present the annual budget of the government of India.
Today’s edition of The Hindustan Times has one such a story according to which the “the government is considering hiking the tax deduction limit on home loan interest from the present Rs 1.5 lakh to more than Rs 2 lakh per annum.”
The story goes on to quote an expert to state that this increase in tax deduction will lead to an “increase the demand for housing units and have a multiplier effect on the economy through increased demand for steel, cement and labour.”
This is what we call kite flying of the highest order. Lets try and understand why.
Currently a deduction of upto a maximum of Rs 1.5 lakh is allowed for interest paid on a home loan. At the highest tax level of 30.9% (30% tax + 3% education cess) this means a tax saving of Rs 46,350 (30.9% of Rs 1,50,000).
Now let us say this is increased to Rs 2 lakh. At the highest tax level of 30.9% this would mean a tax saving of Rs 61,800 (30.9% of Rs 2,00,000). This implies an increased tax saving of Rs 15,450 per year (Rs 61,800 minues Rs 45,350) or Rs 1287.5 per month.
So basically what The Hindustan Times story really tells us is that people of this country will buy homes because they will save Rs 1287.5 more every month. But what it does not tell us is the amount of money they will have to spend to get this extra tax saving.
Let me throw more numbers at you. The story points out “The average home loan size has grown from about Rs 17 lakh about three years ago to close to Rs 22 lakh currently.” Let us consider a 20 year home loan of Rs 22 lakh taken at an interest rate of 10% (the actual home loan interest rates might be higher currently though).
The EMI (equated monthly instalment) on this loan would be Rs 21,230.48. Hence to get an extra tax deduction of Rs 1287.5 per month any individual taking a home loan would have to first spend Rs 21,230.48 which is 16.5 times more.
I guess people of India are clearly more intelligent than that. And I don’t see many people doing that.
People don’t buy homes to get a tax deduction. The average middle class Indian buys a home to stay in it. And for that to happen a couple of things need to happen. First and foremost real estate prices need to come down because only then will EMIs become affordable.
As The Hindustan Times story points out that three years back the average home loan size was Rs 17 lakh and now it is Rs 22 lakh. This has happened because home prices have gone up since then.
A home loan of Rs 17 lakh at an interest of 10% for a period of 20 years would mean an EMI of Rs 16,405.37. Hence, EMIs have gone up by around 29.4% in the last three years. And that makes it difficult for individuals looking to buy a home to live in.
The difference between the EMIs on a home loan of Rs 22 lakh and a home loan of Rs 17 lakh is around Rs 4825. This is 3.75 times more than the extra tax saving of Rs 1287.5 that would happen when the tax deduction limit on home loan interest goes upto Rs 2 lakh per year from the current Rs 1.5 lakh.
Also to get a bigger home loan one needs a higher income as well. Hence, an income required to get a Rs 22 lakh home loan is higher than the income required to get a Rs 17 lakh home loan.
So for people to start buying homes to live in real estate prices need to fall from their current atrocious levels. Whether that happens remains to be seen. As my paternal grandfather told me late last evening “roti kapda aur makaan ka daam kabhi nahi girta. (The price of food, clothes and houses never falls).”
The second thing that needs to happen for sales of homes to pick up is a fall in interest rates. At an interest rate of 8%, a 20 year home loan of Rs 22 lakh would imply an EMI of Rs 18,401.68. This would imply a lower EMI of Rs 2828.8 than at the 10% level.
In fact I have made all the calculations at the highest rate of tax of 30%. At lower rates of tax it makes even less sense to buy a home to get an extra tax deduction. Also, the average home loan in cities is obviously higher than the Rs 22 lakh used here. In cities, it is highly unlikely one would be able to buy anything for that kind of home loan value. Hence, the argument holds even greater value for cities where prices are much higher.
To conclude, the real estate market in India has been taken over by speculators looking to put their black money to some use. And currently it is these speculators playing a game of passing the parcel among themselves. Unless that breaks people won’t start buying homes, higher tax deductions notwithstanding.
This article originally appeared on www.firstpost.com on February 4, 2013
(Vivek Kaul is a writer. He can be reached at [email protected])