Transcript Slide 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
Contents
Global
India
Housing
• Global Developments
• Indian Economy
• Impact on Housing
2
More Uncertainty on Global GDP
Real GDP Growth (%)
7.4
5.1
GLOBAL OUTLOOK
6.6
6.4
4.3
3
2.8
2.6
2.2
-0.5
2009
4.5
2010
2011(P) 2012(P)
-3.4
Emerging Economies
World
Advanced Economies
Source: IMF, June 2011
•Down side risks have increased
again
• Increased global volatility
• Growth in advanced economies
are expected to continue to
remain weak
• Growth in emerging economies
is strong, though inflationary
pressures are likely to sustain
3
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
4
Rising Debt to GDP Ratios
Public Debt to GDP
Japan
• Debt has been rising faster than economic
213% output.
Greece
157%
Italy
129%
Ireland
120%
Portugal
111%
US
100%
France
97%
UK
89%
Germany
87%
Spain
74%
India
73%
China
PUBLIC DEBT
18%
•EU: Greece, Portugal and Ireland bailed out
Spain & Italy: A case of too big to fail but also too
big to bail?
• US grappling with the problem of future
entitlements i.e. public subsidies for social
security, healthcare, housing etc.
• Need to reduce fiscal spending and raise taxes –
but difficult with high unemployment and low
growth
• Public debt in India is mostly denominated in
Indian rupees and is owed to resident agents,
hence less likely to be affected by uncertainty in
the international debt and currency markets. India
is largely a domestic economy.
5
Commodity Prices Still on the Upsurge
IMF Index of Primary Commodity Prices in US $
2005=100
COMMODITY PRICES
• Commodity prices impact countries
depending on whether they are net
importers or exporters of commodities.
300
250
•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
200
150
100
50
0
2005 2006 2007 2008 2009 2010 Jul-11
Food
Metals
Source: IMF
Agri Raw Materials
Petroleum
•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.
6
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 growth in 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.
7
Indian Economy: Strong Fundamentals
• India remains the second fastest growing
economy after China
•India is a domestic consumption driven
economy
- Consumption accounts for 70% of
India’s GDP
10-Year GDP Growth Trend
(%)
10.0
8.0
Growth still robust: FY 12 (P): 8% *
8.5
9.5
5.8
6.0
4.0
2.0
8.6
9.3
9.6
7.6
6.8
8.0 8.0
4.4
3.8
0.0
• Services sector contributes close to 60%
of GDP
• High savings rate at 35%
•Middle class expected to rise to 800 mn
by 2020 from 250 mn currently
•Favourable Demographics – 60% under
the age of 30 years
(%)
15
Sector-wise GDP Growth
Service sector drives growth
10
Agriculture
Industry
5
Services
0
FY 09
•Well regulated financial system
FY 10
FY 11 FY 12(P)
8
* Source: RBI Annual Report, 2010-11
Inflation: India’s Bugbear
• Inflation remains the key macro-economic risk
and challenge.
•Inflation has been above the 9% mark for 8
consecutive months.
Y-o-Y WPI Average %
10 Year Trend
(%)
10
8
8
•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.
6.5
7.1
6.5
5.5
6
4
2
9
8.6
3.6
3.4
4.4
4.8
3.6
0
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%.
9
Higher Interest Rates Won’t Wish Away
the Inflation Problem
How Rates Have Moved…
Overnight MIBOR
1 yr G-Sec
5 yr G-Sec
10-yr G-Sec
I yr AAA Corp Bond
5 yr AAA Corp Bond
10 yr AAA Corp Bond
Current*
1 year
8.04
8.15
8.24
8.27
9.36
9.38
9.38
%
ago
5.20
6.50
7.82
8.13
7.80
8.54
8.78
11 Repo Rate increases since
March 2010 i.e. 300 bps increase
10%
Repo Rate
8%
8%
6%
5%
4%
2%
0%
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
10
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
11
Housing Loans & Interest Rate Cycles
Interest
Rate (%)
13.00
12.00
12.50
Downward cycle
Upward cycle
12.50
10.75
11.00
10.00
8.75
9.00
8.00
7.00
8.25
Indicative Home Loan Rates
• 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.
12
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)
13
45
9.00
40
8.00
35
7.00
30
6.00
22.0
25
5.00
15.6
20
4.00
11.1
15
3.00
8.3
10
6.6
5.9
5.3
5.1
4.7
4.3
4.7
5.0
5.1
5.1
4.5
4.7
4.8
2.00
5
1.00
0
0.00
Property Cost (Rs Lac)
Affordability
Annual Income (Rs Lac)
Property Value (Rs Lac) &
Affordability
Improved Affordability
Annual Income (Rs Lac)
1 Lac = 1,00,000
Representation of property price estimates
Affordability equals property prices by annual income
14
Low Penetration Implies Room For Growth
MORTGAGES AS A % OF GDP
120%
104%
100%
88%
81%
80%
60%
48%
39%
40%
17%
20%
20%
26%
29%
41%
32%
9%
0%
Source: European Mortgage Federation, 2009, World Bank, 2008 & BCG Banking Report, 2010
15
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
16
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
17
Thank you