RBI needs to answer some questions on home loans

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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)

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About vivekkaul
Vivek Kaul is a writer who has worked at senior positions with the Daily News and Analysis(DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System , the latest book in the trilogy has just been published. The first two books in the trilogy were published in November 2013 and July 2014 respectively. Both the books were bestsellers on Amazon.com and Amazon.in. Currently he works as an economic commentator and writes regular columns for www.firstpost.com. He is also the India editor of The Daily Reckoning newsletter published by www.equitymaster.com. His writing has appeared across various other publications in India. These include The Times of India, Business Standard,Business Today, Business World, The Hindu, The Hindu Business Line, Indian Management, The Asian Age, Deccan Chronicle, Forbes India, Mutual Fund Insight, The Free Press Journal, Quartz.com, DailyO.in, Business World, Huffington Post and Wealth Insight. In the past he has also been a regular columnist for www.rediff.com. He has lectured at IIM Bangalore, IIM Indore, TA PAI Institute of Management and the Alliance University (Bangalore). He has also taught a course titled Indian Economy to the PGPMX batch of IIM Indore. His areas of interest are the intersection between politics and economics, the international financial crisis, personal finance, marketing and branding, and anything to do with cinema and music. He can be reached at vivek.kaul@gmail.com

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