Developers, not banks, need to stimulate demand
RBI Governor Raghuram Rajan got it absolutely right when, in response to a question from SBI chairman Arundhati Bhattacharya last week on whether teaser home loans could be introduced to stimulate demand, he said the real issue was of housing prices coming down. Certainly teaser loans will encourage more people to look at buying houses, as they did when they were first introduced by SBI in 2008, but the dramatic slowing of purchases suggests that potential home buyers could be waiting for prices to come down first. In the top 7 residential markets in the country, for instance, as FE has reported in the past, while 90,488 housing units were sold in Q1FY14, this fell to 75,118 in Q3FY14, and further to 57,490 units a year later in Q3FY15. While the number of new launches has naturally come down dramatically—from 125,623 units in Q1FY14 to a mere 46,521 units in Q3FY15—the unsold inventory is up from 650,877 units to 724,727 units. If housing prices come down to clear this inventory, potential home buyers know they will stand to gain much more from this than they will from the teaser loans—in any case, the teaser loans offer a lower rate of interest only for the first year or two. SBI’s teaser loans, a great success when they were launched, had to be pulled out later when the central bank expressed its concerns over whether this was misleading customers.
Juxtapose this demand-supply mismatch situation with the R6.5 lakh crore that banks have outstanding to home-owners—that’s over a tenth of all outstanding bank credit—and there is a potential problem if payments start getting delayed or defaults starting to happen. RBI’s Financial Stability Report projects that construction NPAs could go up from around 5% of outstanding loans in March 15 to around 6.5% in a severe stress situation. Over the last one year, housing loans grew 16.4% which is more than double the growth in overall loans to all sectors. Right now, according to market analysts, more than 7 lakh houses remain unsold in the top 7 cities in the country. In the NCR, for instance, unsold property levels are at a 5-year high. In which case, developers who are strapped for cash have the option of either not being able to make loan repayments on time to banks or to drop prices enough to be able to clear supplies. How much prices can drop is not clear. Based on inventory levels and current levels of absorption, it could take 3-4 years to clear the backlog. In which case, particularly if the banks force developers to make payments on time, prices could fall significantly in order to induce purchases of flats/houses. If that does happen, the loan-to-value ratios of bank loans for housing that look comfortable today at around 66% could suddenly look a lot less so. Either way, there is reason for banks to be cautious since, at around 40%, the EMI-to-income ratio does not offer too much room for comfort either, particularly if jobs growth does not take place at a sufficiently high pace.