THERE’S NO REAL ESTATE BUBBLE HERE

HOMES ARE 3 TIMES MORE AFFORDABLE TODAY THAN THEY WERE 10 YEARS AGO: HDFC’S MISTRY.
The absence of exotic, complex home loans have helped stave off a sub prime like crisis in India, according to HDFC managing director Keki Mistry.

“There are several reasons why India has been shielded from the sub prime crisis. Indian borrowers are typically debtaverse and cautious, simple plain vanilla home loans are offered and not exotic complex products, the loan-to-value ratios are conservative, the securitisation and structured product market is still in a nascent stage and the central bank has been vigilant and has taken pre-emptive measures to prevent asset bubbles,” said Mr Mistry, in his speech at the Corenet Global Summit this week.

Quality of mortgage assets worldwide has come into focus, following the sub prime crisis in the US. In India, home loans have been growing at over 30% for 3-4 years on the back of increase in the number of borrowers and a sharp rise in property values. In the US, the sub prime crisis was triggered by aggressive lenders, extending uniquely structure loans where repayments were backended against equated monthly installments (EMIs) in India.

Moreover, loans were provided to even those without adequate income against the security of the property. These loans turned bad when the borrowers could not repay and the property values fell. Mr Mistry pointed out that although the housing shortage indicated that owning their home was beyond the reach of many, affordability had increased three-fold in the last 10 years.

“Compared to, say, about 10 years ago, where it took close to 15 times one’s annual income to buy a home in a Mumbai suburb, today this ratio has come down to 4.9 times. But the key reason why affordability has improved is due to a substantial rise in incomes, as job opportunities have increased manifold. Other factors that have contributed to increased affordability are relatively stable and moderate interest rates and tax incentives.” He added that as a result of rising incomes today, the average age of a person availing a housing loan is in the mid-30s. Despite a healthy supply of residential accommodation, especially in tier-II cities, the strong demand has ensured a healthy price appreciation across the country, said Mr Mistry.

He added that some areas that saw an extraordinary run-up in prices include places like Gurgaon, Noida and Whitefield in Bangalore. Parts of Pune and Mumbai have seen a correction recently. “The important thing about the residential real estate sector in India is that most of the end users are genuine. In fact, most are first time home buyers. Today, I believe speculators in the residential markets are not prominent,” he said.

Courtesy-: ET 7 March, 2008