India Housing Finance: The last hurrah

Housing finance portfolios of Indian Banks and HFC’s have arguably been the best performing asset class in the last 15 years, with delinquency ratios across most lenders at less than 100bp and their credit costs at less than 30bp. However, the period was marked by a sustained increase in property prices, and not necessarily a fall in interest rates. Housing finance portfolios had extra cushion in form of cash down payment which was an integral part of majority of home purchases in India paid out of the pocket of buyer. Rising property prices, nominal GDP growth ( real growth plus inflation) rates of 13-15% for better part of this century created excellent employment opportunities and double digit salary growth all led to this Physical asset scoring over any other asset class. The turf is now becoming more competitive as more banks with attractive deposit franchise jostle for market share in absence of credit growth from their traditional corporate borrowers. India Ratings in this report talks about smaller room for growth for large ticket housing loans .

I see few more headwinds emerging for real estate over next few years based on my understanding of Macro.
1. Rise in Real estate prices in past were more a function of rising inflation which led to value of money falling dramatically hence rising property prices.With inflation targeting adopted by RBI, demonetisation, which will reduce the black money proportion in real estate transactions, RERA act (real estate regulation act), Implementation of Benami transaction act (Income tax crackdown begins: 87 notices issued, 42 assets worth crores attached under Benami Act ) it is highly unlikely that we will see real estate prices rising like before.

2. I see nominal GDP growth in next couple of years at around 10-12% driven more by government expenditure rather than private sector. This will certainly impact the profitability of corporate India and in turn will lead to muted wage growth for the employees. In fact,rightsizing (read downsizing) is the new word. Consider this,number of employees employed in IT sector is negative YOY for the first time since 2000. The country’s biggest bank by market cap HDFC Bank shed 4500 employees for the first-time bank has started operations. The insecurity in private sector employees has started to creep in and the companies catering to outsourcing are already feeling jittery after Trump election

3. HFC’s which cater to small value loans will not be effected as govt expenditure is set to rise for this section of society in run up to Lok Sabha election to be held in 2019. There are also signs that agricultural commodities have bottomed out with the classic theory of “Poverty amidst plenty” slowly reducing the crop planted in main agricultural regions of western world.I see rising soft commodities prices, which should positively affect the balance sheets of rural households.
The debt/ GDP for household in India is not at alarming levels as compared to other Emerging countries, but in absence of strong nominal GDP growth we will reach there in next 2-3 years and that is when music stops for lenders and delinquencies will start rising.

India Ratings report
HFCs – india ratings