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Housing Demand in the Context of Global Developments & Rising Inflation

Housing Demand in the Context of Global Developments & Rising Inflation. Keki Mistry Vice Chairman & CEO HDFC Limited. 32 nd Meeting of CEOs of Housing Finance Companies National Housing Bank August 30, 2011. Contents. More Uncertainty on Global GDP. Real GDP Growth (%).

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Housing Demand in the Context of Global Developments & Rising Inflation

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  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 Real GDP Growth (%) Source: IMF, June 2011

  4. The Downgrade & the Market Bloodbath • August 5, 2011: S&P 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 S&P 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 US’s 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 • COMMODITY PRICES • Commodity prices impact countries depending on whether they are net importers or exporters of commodities. • Average crude oil price in CY so far: US$ 112 per barrel • In FY 2011 India imported 87% of its crude oil requirements • RBI estimates that a 10% increase in oil prices leads to a 0.3% reduction in GDP growth • Surge in prices of precious metals • Gold viewed as a ‘safe haven’ commodity in times of uncertainty • In August 2011, gold touched a record high, crossing US $ 1,900 an oz. Source: IMF

  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 growthin 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 Sector-wise GDP Growth Service sector drives growth (%) * Source: RBI Annual Report, 2010-11

  9. Inflation: India’s 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 Average headline inflation for FY 12 is likely to be ~8.5 to 9% -- higher than RBI’s revised target of 7%.

  10. Higher Interest Rates Won’t Wish Away the Inflation Problem How Rates Have Moved… % 11 Repo Rate increases since March 2010 i.e. 300 bps increase Repo Rate Bank Base Rates are currently between 10 to 10.75% compared to 7.5 to 8% a year ago. • Credit off take showing signs of slowdown • Liquidity is still there • Supply bottlenecks need to be addressed • Will RBI pause on a further rate hike increase in September 2011? • 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 Interest Rate (%) Downward cycle • 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 India’s population is below 30 years of age • Rapid rise in new households • Low penetration • Housing shortage estimated at 24.7 million units • Rural:14.1 million units, Urban:10.6 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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