The State of Real Estate, Six Months After Demonetisation: Falling Prices, Desperate Builders & Return of Black Money

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Housing and real estate is one area in India where writing anything is very difficult given the lack of data. Nevertheless, a few inferences can be made from the little data that is available.

In the last edition of the Letter we unveiled the Indian Economic Thermometer (IET). One of the inputs into the IET was retail loan growth. A major constituent of retail loans are housing loans. As of March 2017, housing loans formed around 53 per cent of the total retail loans given by banks.

By tracking the total amount of housing loans given by banks, we can make a few inferences regarding the state of the real estate sector in India. So, let’s take a look at Table 1. It shows the total amount of home loans given by banks during the course of a year, over the last few years.

Table 1:

Total Home Loans (in Rs crore) Increase/Decrease with respect to the previous year
2012-13 59,647
2013-14 81,900 37.3%
2014-15 89,935 9.8%
2015-16 1,18,245 31.5%
2016-17 1,13,323 -4.2%

Source: Centre for Monitoring Indian Economy.

Table 1 makes for a very interesting reading. For the first time in five years, the total amount of home loans given by banks during the course of a year, has fallen. The total amount of home loans given out in 2016-2017 was around 4.2 per cent lower than the total amount of loans given out in 2015-2016. This is another data point that shows the largely moribund state of the real estate sector in India.

One point that needs to be kept in mind is the fact that home loans are also given out by housing finance companies. The trouble is that regular data on the home loans given by housing finance companies is not available. And this is ironical because housing finance companies are regulated by the National Housing Bank(NHB), which is a 100 per cent subsidiary of the Reserve Bank of India(RBI). It is worth asking that when the RBI can put out month on month data on loans given by banks, what is stopping the NHB?

The latest data I could find on this front was as of March 31, 2015 and that is really not of much help more than two years later, given that we are trying to look at the current state of home loans. In 2014-2015, housing finance companies gave out home loans worth Rs 75,488 crore. During the same year, banks gave out home loans amounting to Rs 89,935 crore. This means that in 2014-2015, housing finance companies gave out around 45.6 per cent of the total home loans. In an ideal world, this data should not be ignored. But given that we don’t have access to it, there is nothing really that we can do about it.

Getting back to the point. Let’s get into a little more detail into the home loans given by scheduled commercial banks during 2016-2017. Let’s look at March 2017. During the course of the month, banks gave out total home loans of Rs 39,952 crore. This basically means that 35.3 per cent of the total home loans given out during the course of the year, got disbursed during one month, which happens to be the last month of the financial year.

What is happening here? Before March 2017, Rs 18,900 crore worth of home loans were disbursed in September 2016. This amounted to 17 per cent of the total home loans disbursed during the course of the year. Hence, between the two months, more than half of the home loans disbursed during the year, were disbursed.

It is well known that builders have got a huge amount of unsold inventory with them. This inventory has been in various stages of construction. At the same time, the builders have been trying to sell this inventory for a while now, by offering a better price as well as goodies on the side.

As some of this inventory has achieved completion stage, it has become slightly attractive for homebuyers given that people prefer buying finished homes these days in comparison to under-construction ones. Also, with builders wanting to show good year end numbers they have gone easy on the price in the month of March 2017, is what bankers tell me.

There is another phenomenon at work. These days people don’t apply for a home loan just at the point of time short-listing and buying a home. They apply for it in advance and get the loan sanctioned but not disbursed. The moment they get a good price for a home, they get the loan disbursed. That is another explanation for a jump in home loan numbers in March 2017.

Also, once people buy a ready to move in new home, there is activity in the secondary home market as well. They may want to sell the homes they were living in, and that also leads to more people taking on home loans. This phenomenon is likely to play out more in the coming months, if the basic assertion I am making turns out to be correct.

Another point mentioning here is that between November 2016 and February 2017, banks barely gave out any home loans. During the period, the banks gave out home loans worth Rs 8,851 crore. In March 2017, they gave out total home loans of Rs 39,952 crore, which was 4.5 times the home loans given out in the previous four months.

A major reason why people weren’t taking on home loans between November 2016 and February 2017 was demonetisation. There simply wasn’t enough currency going around. With this, the real estate transactions came to a standstill because without currency it wasn’t possible to fulfil the black part of the real estate transaction. Those who owned homes(builders and investors) were not ready to sell homes, without being paid for a certain part of the price, in black.

By March 2017, nearly three-fourths of the demonetised currency was replaced.

This basically means that by March 2017, there was enough currency in the financial system for the black part of the real estate transactions to start happening all over again. Also, the Rs 2,000 note makes this even more convenient.

This availability of currency ensured that the black part of any real estate transaction could be easily paid, which had become difficult between November 2016 and January 2017. Once the black transactions became possible, real estate started getting bought and sold again, and this in turn ensured that home loans started to be disbursed again.

Between builders desperate to end the financial year on a good note and currency finding its way back to the financial system, people started taking on home loans again. The interesting question is whether this revival in home loans will continue. For that we will have to wait for the home loan data of April 2017.

The big question here is that are real estate prices falling? If you listen to what the real estate industry has been saying you would feel that real estate prices have either not been falling or will not fall more.

Ashutosh Limaye, Head-Research & REIS, JLL India, told ET Now thatprices have come down but by and large prices are holding.” Or as Getamber Anand told Moneycontrol.com:  “I feel prices in most markets have bottomed out and stabilised with little or no margin for further reduction.”

Let’s look at some data to see if this is true. As I mentioned earlier, real estate data is not easy to get. The simple way to figure out whether prices are going up or down or are flat, would be to look at the prices at which deals are happening. But given that there is no such data at an agglomerated level, one has to try and look at this in a slightly different way.

Every bank has to carry out what the RBI calls priority sector lending. What kind of lending gets categorised as priority sector lending in case of home loans? As per a RBI circular dated April 23, 2015, a priority sector housing loan is defined as: “Loans to individuals up to Rs 28 lakh in metropolitan centres (with population of ten lakh and above) and loans up to Rs 20 lakh in other centres for purchase/construction of a dwelling unit per family provided the overall cost of the dwelling unit in the metropolitan centre and at other centres should not exceed Rs 35 lakh and Rs 25 lakh respectively.”

This is how priority sector home loans continue to be defined. Hence, housing loans of up to Rs 28 lakh in a city with a population of Rs 10 lakh or more, and financing the purchase of a home with a price of up to Rs 35 lakh, is categorised as a priority sector housing loan. In other centres, a priority sector housing loan is a loan of up to Rs 20 lakh used to finance the purchase of a house with a price of up to Rs 25 lakh.

Let’s look at Table 2. It shows the priority sector loans as a proportion of total home loans given by banks.

Table 2:

Total Home Loans (in Rs Crore) Priority Sector Home Loans (in Rs Crore) Proportion
2012-13 59,647 1,349 2.3%
2013-14 81,900 34,800 42.5%
2014-15 89,935 20,386 22.7%
2015-16 1,18,245 19,890 16.8%
2016-17 1,13,323 26,082 23.0%

Source: Centre for Monitoring Indian Economy.

What does Table 2 tell us? We are interested only in the years 2015-2016 and 2016-2017, when the definition of priority sector housing loans was the same. What we can see is that in 2016-2017, nearly 23 per cent of the loans given out were priority sector home loans. In 2015-2016, this figure was at just 16.8 per cent. In absolute terms, 31.1 per cent more priority sector home loans were disbursed in 2016-2017 than in 2015-2016.

What does this mean? It means that banks have financed more homes with an official registered price of Rs 35 lakh or lower in metropolitan cities and Rs 25 lakh or lower in other centres. We use the term official registered price, simply because a black component always gets paid in cash, over and above the official price.

With banks financing more homes of Rs 35 lakh or lower in metropolitan cities and Rs 25 lakh or lower in other centres, it basically means that either prices have come down or more homes have been built in that segment (which builders like to call affordable housing). Hence, more homes have become available in the sub-Rs 35 lakh segment in the metropolitan centres and in the sub-Rs 25 lakh segment, in other centres.

In fact, in the month of March 2017, when the maximum amount of home loans were given out in comparison to any other month during the last financial year, 28 per cent of the loans were priority sector home loans.

Given this, home loan data does suggest that home prices have fallen. Of course, there is no way of figuring out to what extent have the prices fallen. The answer would be different for different parts of the country.

But how does all this work at a personal level? One technique of driving down the price is to keep talking to the representative of the builder over a period of time, keep him interested and keep driving down the price. Of course, this needs a lot of patience and depends on how desperate the builder is to sell what he has already built.

The column originally appeared on Equitymaster on May 10, 2017

DON’T HAVE TIME TO GO THROUGH BUDGET? HERE ARE 7 THINGS YOU SHOULD KNOW

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Yesterday, while watching my 12th budget speech, at around noon, I fell asleep. The dozen years of watching long and boring budget speeches finally caught up with me.

When I woke up at 1.30 pm, I was extremely hassled at having missed the budget speech, only to realise that I hadn’t missed much.

As far as budgets go, the finance minister Arun Jaitley’s fourth budget was a fairly straightforward one. And dear reader, if you haven’t bothered following it up until now, there is nothing more you need to do, than just read this piece.

So, here are the seven most important things that you need to know about the budget:

a) For incomes between Rs 2.5 lakh and Rs 5 lakh, the rate of income tax has been reduced to 5 per cent. Earlier it was at 10 per cent. This would mean that anyone having a taxable income of Rs 5 lakh or more will pay a lesser tax of Rs 12,500.

b) The finance minister also said that he plans to introduce a simple one page tax return form for individuals having a taxable income of up to Rs 5 lakh other than business income. This promise of simplifying the income tax return form has been made in the past as well. Let’s see how properly it is implemented.

c) Data from past income tax returns shows that during the financial year 2013-2014 only 23.7 lakh individuals declared income from house property i.e. rental income. This basically means that most landlords do not declare their rental income while filing their returns.

Now on, any individual paying a rent of greater than Rs 50,000 per month, will have to deduct a tax of 5 per cent at source. As Sandeep Shanbhag, director of Wonderland Consultants, a tax and investment advisory firm, puts it: “It is also proposed to provide that such tax shall be deducted and deposited only once in a financial year through a challan-cum-statement.”

d) In its war against cash, the government has made it mandatory that no transaction above Rs 3 lakh will be permitted in cash. One thing that it missed out on here is the fact that gold worth lower than Rs 2 lakh can still be bought without showing any identity proof. In fact, this is how jewellers converted demonetised Rs 500 and Rs 1,000 notes into gold, on the night of November 8 and November 9, 2016, when the Modi government suddenly demonetised these notes.

e) Currently, a long-term capital gains tax on immovable property or real estate has to be paid, only if it has been held for three years. The capital gains made on any property sold in less than three years is added to the income for the year and taxed at the marginal rate of tax. The government has decided to reduce this holding period to two years. This is good news for those looking to sell homes bought anywhere between two to three years back.

f) The finance minister also said that “the base year for indexation is proposed to be shifted from 1.4.1981 to 1.4.2001 for all classes of assets including immovable property.” What does this mean? While calculating the capital gains on real estate that has been sold indexation benefits are available. Indexation essentially allows the seller of real estate to take inflation into account while calculating his cost price.
If the property had been bought at any point of time before April 1, 1981, the price as on April 1, 1981, would have be taken into account while calculating the capital gains. This date has now been moved to April 1, 2001. This basically means that anyone who had bought property before April 2001, gets the price of April 2001 as the cost price, while calculating the capital gains. In the process, the capital gains made will come down.
As Jaitley put it: “This move will significantly reduce the capital gain tax liability while encouraging the mobility of assets.” What this means in simple English is that more people will be incentivised to pay income tax rather than carry out a part of their transaction in black.

g) The government has also inserted a section into the Income Tax Act which essentially states that: “set off of loss under the head “Income from house property” against any other head of income shall be restricted to two lakh rupees for any assessment year.” What does this mean? If you have a bought a home by taking on a home loan and are living in it, then you don’t need to worry. Currently, a deduction of Rs 2 lakh can be made against other heads of income for paying interest on a home loan. This continues.

As Shanbhag puts it: “Interest paid on housing loan could be set off against other income (say salary) i.e. the loss from house property could be adjusted against salary income to reduce the final tax liability. On second homes, this was much more significant as the entire interest without any limit (after first adjusting against a real rental income or a notional rental income in case the house was not rented) could then be further adjusted against incomes from other heads (like salaries etc).” Thus, the tax to be paid, could be massively brought down.

As Shanbhag further puts it: “Now, this adjustment against other heads of income has been restricted to Rs 2 lakh per year. Any unabsorbed interest can be carried forward but then will be subject to similar restrictions the following year. In one stroke, the tax arbitrage related to the housing sector has vanished.”

The government has basically plugged a loophole. Hence, now irrespective of the number of home loans that an individual has, the set off cannot be more than Rs 2 lakh.

The column originally appeared in Bangalore Mirror on February 2, 2017

The Luck of Investing in Real Estate

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When flying out of the terminal 2 at the Chatrapati Shivaji International Airport in Mumbai, I like to follow a certain routine.

This includes eating a sandwich along with a cup of coffee and watching airplanes take off and land. The entire routine lasts for around 15 minutes. And this is precisely what I was doing two days back, when I saw a person walking towards me. I wouldn’t call him a long-lost friend but he was someone I had come to know during my course of work.

Don’t we all know a bunch of people we know, but we really don’t know? So, he was one of those.

“And who have we run into,” he said, sitting down in front of me. After the mandatory hello, this gentleman got to the issue straight away. “So why are you so against investing in real estate?” he asked.

“Well, I am not against anything. I am only against things which don’t make sense to me at a certain point of time. And as of now it doesn’t make sense to invest in real estate, in my humble opinion. But if you want to buy a home to live-in, that is a different issue altogether,” I explained, extremely irritated at having been disturbed.

“Oh, you know but the value of the home I bought has gone up four times,” he said with great confidence.

This is the oldest argument made by those still confident about investing in real estate. It comes in two forms. One form was just cited above. The other form is to talk about a third person who seems to have made money by investing in real estate. This can include Sharma ji, Verma ji, Gupta ji, Mr Banerji or Mr Subramanian, one of whom lives down the road.

This argument deals in absolutes. “I bought for Rs. 10 lakh and I sold it for Rs. 50 lakh,” is how you go about selling this point. The trouble is that it doesn’t take into account any expenses incurred in between.

This includes the maintenance cost that needs to be paid to the society every month. Or the property tax that needs to be paid to the municipality every year. Or the cost of insuring the home. Or the interest on the home loan. Or the cost of buying an insurance on the home loan. On the positive side, it does not include any rent that comes in and any tax deductions that are made.

The point being that no one calculates the return on investment on investing in property. In fact, there is no such number going around. If you want to know the past returns of a stock or a mutual fund, it is very easy to find that. But if you want to know about the past returns on real estate, there are only absolute numbers going around.

There are only stories. And people like to believe in stories, not numbers.

“So when did you buy this home?” I asked the gentleman.

“Around 2005,” he replied.

“You were lucky,” I blurted out.

“What do you mean?” he asked.

I had made the proverbial mistake of attributing the success of a person to his luck. And given that I would have to explain what I meant.

“Well, if you had invested in real estate any time post 2009, there is a reasonably good chance that your investment would have ended up in a mess,” I explained.

“What do you mean?” he asked again.

“Many people who invested in real estate post 2009, still haven’t got the homes they had invested in. The builders have either run out of money or in some cases simply disappeared.”

“Oh,” he replied, rather nonchalantly.

“So, in many cases people who thought they are buying a home to live in, have had to continue paying the rent on the home that they live in, along with the EMIs.”

“Oh,” he said again.

“They are basically screwed.”

“But what are you trying to say?”

“Success in real estate investing like many other things in life is also a matter of timing. You think you have made money because you invested in 2005. Many others who invested in 2009 or after, are stuck. And unlike other forms of investing there is no exit route. Also, given that the amount involved in this case is large, there is no getting back from it,” I explained.

“Oh, but all that doesn’t apply to me,” he said rather confidently.

“Really? So, this home you bought and which has gone up four times in value, have you ever tried selling it?” I asked.

“Yes.”

“And for how long have you been trying to sell it?”

“For the last six months.”

“And you still haven’t managed to find a buyer for it?”

“No. I think it is worth a certain price. But the stupid buyers haven’t been willing to pay.”

“Ah!”

“My broker also thinks it is worth the price that I think it’s worth.”

“Oh, really. The price you and your broker have, is in your head. That is certainly not the market price, because if it was, your home would have been sold by now.”

“That is not the case,” he responded very aggressively.

“You are anchored on to a price and are not willing to sell for anything less than that price. But in the time to come, as your home continues to remain unsold, you will revise your expectations and be ready to sell at a lower price,” I said, gulped my cup of coffee, and started walking towards gate number 87 to catch my flight.

To conclude, if you are unable to sell a house that you had bought as an investment, that doesn’t make the buyer stupid.

The column originally appeared in Vivek Kaul’s Diary on October 26, 2016

Jaitley needs to talk about high home prices, not just high EMIs

Fostering Public Leadership - World Economic Forum - India Economic Summit 2010

Sometimes I think that the finance minister Arun Jaitley has this constant need to talk and in the process he ends up saying stuff which looks rather silly.
Like he said yesterday in Hong Kong: “RBI historically has been a very responsible institution. Now, as somebody who wants India’s economy to grow and who wants domestic demand to grow, I will want the rates to come down…Real estate, for example, can give a big push to India’s growth and this is a sector which is impacted by high policy rates. Therefore, if the policy rates come down over the next year or so, certainly this is one sector which has a huge potential to grow.”

In fact, this is something that Jaitley has said in the past as well. As he said in December 2014: “now time has come with moderate inflation to bring down the rates. If you bring down the rates, people will start borrowing from banks to pay for their flats and houses. The EMIs will go down.”

There is nothing wrong in Jaitley wanting interest rates to come down. Politicians all over the world like lower interest rates because they believe that lower interest rates lead to more borrowing which translates into economic growth. Hence, one really can’t hold that against Jaitley. He was only saying what others of his tribe firmly believe in.

But believing that lower interest rates will lead to the revival of the real estate sector is rather simplistic. The logic here is that since interest rates are high, the EMIs on home loans are high as well. And at higher EMIs people are postponing the home purchase decision.

If interest rates are cut, EMIs on home loans will come down, people will buy homes and this will lead to the revival of the real estate sector.  QED.

But as I said earlier in the piece, this reasoning is rather simplistic. Allow me to explain. Every month the Reserve Bank of India puts out sectoral deployment of credit data. This data gives a breakdown of the various sectors banks have loaned money to, including home loans.

Between July 25, 2014, and July 24, 2015, the total amount of home loans given by banks grew by 17.8%. In comparison, the home loans between July 26, 2013 and July 25, 2014, had grown at 17.4%. So, home loans given by banks continue to grow at a very fast pace.

The overall lending by banks between July 2014 and July 2015 grew by 8.2%. Between July 2013 and 2014, the overall lending by banks had grown by 12.6%.

Hence, during the last one year, the growth of overall lending by banks has fallen. Nevertheless, the total amount of home loans given by banks has gone up at a much faster pace of 17.8%, in comparison to 17.4% earlier.

Hence, despite the high interest rates, home loans continue to grow at a fantastic pace. Also, in the last one year, home loans formed around 21.6% of the overall lending carried out by banks. Between July 2013 and July 2014, the number was at 13.2%.

What this clearly tells us is that home loan lending has not slowed down because of high interest rates. It continues to grow at a fast pace. Hence, Jaitley’s logic goes out of the window completely. But how do you explain the fact that the real estate developers are sitting with so many unsold homes?

In a recent research report PropEquity estimated that the “housing sales in the 19 tier II cities fell by 17 per cent as against a 32 per cent decline in the top 14 Tier I cities in the last two years.” Why are home sales falling despite home loans going up?

One of the possible answers is that the number of home loans being given by banks has come down over the years, as property prices have risen at a very rapid rate. This cannot be said with surety given that RBI does not share this data.

The basic problem with Indian real estate is high prices. And unless prices fall, there is no way sales are going to pick up, lower interest rates or not.

It is worth mentioning here that a fall in interest rates does not have a significant impact on EMIs. A home loan of Rs 50 lakh, at an interest rate of 10% and a tenure of 20 years, leads to an EMI of Rs 48,251. At 9.75%, it leads to an EMI of Rs 47,426, which is around Rs 800 lower. The point being that no one is going to buy a home because the EMI is Rs 800 lower.

Also, in order to get a home loan of Rs 50 lakh, the individual interesting in buying a home would need to arrange Rs 12.5 lakh for a down-payment (assuming an optimistic ratio of 80:20). Further, over and above this, some portion of the price will have to be paid in black as well. The question is even in Tier I cities how many people are in a position to spend this kind of money? Not many.

Jaitley needs to realise this. If the real estate sector has to pick up, the government has to go after real estate prices. And Jaitley given that he is so used to saying things, must also start talking about high real estate prices, instead of just high interest rates. That would be a nice change from the usual and will possibly have more impact as well.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on Firstpost on September 21, 2015

How corporates have turned Indian banks lazy

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One of the data points that analysts like to refer to while talking about slow economic growth, is the slow growth in loans given out by banks. If we consider the one year period between July 25, 2014 and July 24, 2015, the overall lending by banks grew by 9.4%. In the period of one year between July 26, 2013 and July 25, 2014, the loan growth was much stronger at 12.8%.

In absolute terms, in the last one year, the banks gave out Rs 5,71,820 crore of loans. This is lower than the total amount of Rs 6,88,640 crore, that banks gave out between July 2013 and July 2014.

So banks are not lending as much as they were in the past. And that clearly is a problem. But this does not apply to the money that banks have lent to the government.

Between July 2014 and July 2015, the banks invested Rs 3,40,750 crore in government securities. The government issues financial securities to finance its fiscal deficit or the difference between what it earns and what it spends. Banks buy these financial securities and thus lend to the government.

Interestingly, the investment by banks in government securities during the period July 2013 and July 2014 had stood at Rs 1,298,50 crore. Hence, between July 2014 and July 2015, the investment by banks in government securities has jumped a whopping 162.4%.

In fact, the comparison gets even more interesting when we get deposits raised by banks between July 2014 and July 2015 into the picture. In the last one year banks raised Rs 9,34,090 crore as deposits. Of this 36.6% (or Rs 3,40,750 crore) found its way into government securities. Between July 2013 and July 2014, only 14.7% of deposits raised had been invested in government securities.

What do all these numbers tell us? They tell us loud and clear that the Indian banking system currently wants to play it safe. In other words this is “lazy” banking. Lending to the government is deemed to be the safest form of lending. This is primarily because government can borrow more money to repay the past borrowers. It can also print money and repay its loans. Private borrowers cannot do that.

What is also interesting is that banks are also giving out more home loans than they were in the past. Between July 2014 and July 2015, home loans formed around 17.6% of the total lending. This number between July 2013 and July 2014 had stood at 12.2%. This is primarily because a house is a very good collateral. Also, the rate of default on home loans is very low. In case of HDFC (which is not a bank but a housing finance company) the default rate is at 0.54%, which means that almost no one defaults on a home loan.

In case of State Bank of India, for retail loans, the default rate stands at 1.17%. The bank does not give out a separate default number for home loans. Auto loans, education loans and personal loans, are the other forms of retail loans. The default rates in case of these loans is likely to be higher. Hence, the default rate, in case of home loans given out by the State Bank of India, should be lower than 1.17%.

Compare this to what happens when the State Bank of India lends to mid-level corporates. The default rate is at a very high 10.3%. Hence, for every Rs 100 that India’s largest bank gives out as a loan to a mid-level corporate, more than Rs 10 goes bad.

If one factors all this into account it is not surprising that banks are comfortable lending only to the government and giving out home loans. In fact, over the last one year, banks have lent 47.3% of the total deposits they have raised during the period either to the government or as home loans. The number during the period July 2013 and July 2014 had stood at 24.3%.

Hence, banks are clearly trying to play it safe. This is lazy banking at its best.

Prime Minister Narendra Modi in his meeting with businessmen on September 8, 2015, asked them to increase their risk appetite and increase their investments. This is clearly not going to happen without banks being ready to lend to corporates.

The problem is that the last time banks went on an overdrive while lending to corporates they burnt their fingers badly, with corporates defaulting big time on their loans. And there is no easy way to solve this problem.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on Firstpost on Sep 11, 2015

Here is some basic maths that the real estate wallahs need to learn

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I had thought that I will keep The Daily Reckoning free from any writing on real estate this week. But that won’t happen I guess.

Now getting back to the topic at hand. Earlier this week, the Reserve Bank of India led by governor Raghuram Rajan, presented the third monetary policy statement for this year. The RBI decided to maintain the repo rate at the current level of 7.25%. Repo rate is the rate at which RBI lends to banks and acts as a sort of a benchmark for the interest rates that banks pay for their deposits and in turn charge on their loans.

As is the case always whenever the RBI does not cut the repo rate, there were immediate calls from real estate companies, lobbies and others associated with the sector (or what I call the real estate wallahs) that the RBI should start cutting the repo rate in order to get the sector going again.

Manoj Gaur, president, CREDAI NCR, a real estate lobby told The Economic Times that he hopes that the RBI would cut the repo rate in the time to come. Pradeep Jain, chairman of Parsvnath Developers also told The Economic Times that reduction in the repo rate “will be key to revive sentiment in the real estate sector”. There is nothing surprising here given that the real estate wallahs have been doing this for a while now.

In the monetary policy statement, the RBI said: “Since the first rate cut in January, the median base lending rates of banks has fallen by around 30 basis points, a fraction of the 75 basis points in rate cut so far.”

What this means is that even though the RBI has cut the repo rate by 75 basis points (one basis point is one hundredth of a percentage), the banks have cut the interest rates at which they lend only by around 30 basis points on an average. Hence, home loan interest rates haven’t fallen by as much as the repo rate has.
The real estate wallahs caught on to this point as well. David Walker, managing director of SARE Homes told The Economic Times: “We urge the banks who have only cut rates by about 30 basis points to pass on the full benefit of the 75 basis points cut in rates by the RBI.”

All these quotes essentially give the impression that the RBI is responsible for the crisis in the real estate sector in India and all will be well once the home loan rates come down. Nothing can be more untrue.

Let’s do some basic maths and see. The RBI puts out the sectoral deployment of credit data every month. As per this data as on June 26, 2015, the total amount of home loans given by scheduled commercial banks stood at Rs 6,53,400 crore. Home loans have grown by a very good 15.6% over the last one year. This when the overall lending growth of banks stood at a much slower 7.3%.

How were things last year? As on June 27, 2014, the total amount of home loans given by banks had stood at Rs 5,65,000 crore. Home loans had grown by 17.1%. The overall lending by banks had grown by 12.8%, during the course of one year ending on June 27, 2014.

Between June 2014 and June 2015, overall lending growth of banks over a one year period, has crashed from 12.8% to 7.3%, a fall of 550 basis points. In comparison, home loan growth has fallen from 17.1% to 15.6%, fall of a much lower 150 basis points.

Let me throw in some more numbers. In the last one year, banks gave out home loans worth Rs 88,400 crore. This formed nearly 21% of the total loans given out by banks. Hence, for every Rs 100 worth of loans given out by banks, Rs 21 went towards home loans. This is much more than in the past.

How was the situation in June 2014? In a period of one year ending June 27, 2014, the total amount of home loans given out by banks stood at Rs 82,570 crore. This formed 12.7% of the total amount of loans given by banks. This number as on June 28, 2013, had stood at 12.2%.

What this clearly shows us is that there has been no slowdown on banks giving out home loans, despite interest rates continuing to remain high (in the words of the real estate wallahs). In fact, banks have lent more home loans as a proportion of their total loans in the last one year, than they did in the two years before that. So, home loan lending has no clear link with interest rates as the real estate wallahs would like us to believe.

The question is even though home loans are being given why has there been a fall in demand for homes, leading to builders ending up with a massive amount of unsold inventories. One explanation may lie in the fact that even though the total amount of home loans being given out has gone up at a steady pace, the total number of home loans being given out may be declining. This maybe happening primarily because of the massive increase in home prices over the last few years. And this massive increase has essentially ensured that even though the total amount of home loans has been going up, the total number of home loans may not be growing at the same pace. The RBI does not put out data regarding the total number of home loans.

The RBI sectoral deployment of credit data gives us some hint on this front. The home loan data can be divided into priority sector lending (essentially loans of up to Rs 25 lakh are categorised as priority sector) and non-priority sector lending.

The priority sector home loan lending has grown by just 3.8% during the last one year. On the other hand the non-priority sector home loan lending has grown by a massive 30%. The same numbers as of the end of June 2014 had stood at 7.9% and 30.7%.

Also, as on June 26, 2015, the priority sector home loans of upto Rs 25 lakh given over a one year period formed around 49.1% of total home loans. As on June 28, 2013, to years earlier, the priority sector home loans given over a one year period had formed nearly 59.4% of the total loans. As on June 29, 2012, the priority sector home loans given over a one year period had formed nearly 62.5% of total home loans.

What this tells us very clearly is that priority sector home loans (i.e. loans of Rs 25 lakh or lower) have been falling. And the only possible explanation for this is an increase in home prices.

To conclude, that is where the problem is. The real estate sector cannot be revived by cutting interest rates. It can only be revived by builders cutting prices. Further, a cut in prices will also get the black money wallahs looking for a good deal back into the market. The ball is in the builders’ court. There is nothing that the RBI can do about it.

 Postscript: I will be taking a break from writing The Daily Reckoning next week. I will be back after the independence day.

(The column originally appeared on The Daily Reckoning on Aug 7, 2015)

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