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August 22, 2007
US and Indian Housing Markets and the Desi tune
In view of the subprime crisis in the US, concerns have been expressed all over the media that Indian markets are also potentially quite vulnerable and huge corrections in Indian real estate markets is a distinct possibility.
The US housing credit scenarion, as noted by the Institutional Risk Analytics ( thanks to chris Whalen for mailing me the article "De-Leveraging America")
" The last time the Fed faced a real credit crisis was the early 1990s, when the very solvency of some of the largest US banks was rightly in doubt. It has been that long since the US banking market worked through a true credit collapse. Today the numbers are bigger, the assets are increasingly opaque and illiquid, and the degree of leverage employed many times higher."
Also, see this generous gesture of the Central Bank:
"As of last week, the Fed was offering 85 percent financing on "AAA" rated collateralized debt obligations or CDOs, paper which changes hands at half that rate over-the-counter, when it trades. This explicit bailout for the Street stands in stark contrast to the Darwinian struggle now underway in the real estate sector, where private loan originators are defaulting in droves. But the Fed may not escape loss itself as it bails out the major prime brokers."
( quoted from the same article)
As for the real estate market in India, loans have risen very fast from its low base since 2004 or so, the Press Note 2 of 2005 of Government of India liberalising FDI in Housing, the pace has accelerated. Housing prices have gone up substantially, due to both real demand and speculation. Due to lack of good data, developers have charged high prices to benefit out of buoyant sentiments.
It is not bailout time in india, at least not yet. The central Bank has already tried its hands in tighteniong the market through rate hikes and higher provisioning plus risk weights for the housing sector.The housing market has cooled down a little and builders are seen doling out(grudgingly) various sops to the buyers.Prices are still high, but moderate correction to the breakneck pace in which the market was growing till last year is evident.
Due to relatively lower levels of development of financial intermediaries and markets, there exists substantial excess demand for credit in this part of the globe. The credit to GDP ratio in India is substantially lower than those in the industrialised countries, and even lower than that in China and Korea. It has improved over time, there has been substantial improvement in the credit-GDP ratio in the country from 44.5 per cent in 1980s to 56.8 per cent in early part of the present decade . Even then there are about 60 countries in the world with a higher credit GDP ratio.
The Indian and US housing markets are two different species altogether. If the US market suffers due to competitive pressures and sophistication in financial engineering, the Indian market suffers due to lack of clean data on Housing prices and the burden of expectations.
The risks at this point are lower in India as Indian borrowers are far less leveraged compared to their US counterparts. The financial saving in India has grown steadily since the 1990s and now shows at respectable 30 plus percentage. Default rates in India are historically low, both due to regulation and caution in Banking.Therefore, the borrowers, benefitting from the high growth economy and saving habits, are less prone to default.
In the banking sector, while extreme risk takers are not absent ( and their total absence may not also be ideal for a growing economy), they are certainly outliers. As a consequence, not only the non-performing loans of the Banking sector remain low in general, thanks to the stress on financial stability as an explicit objective of monetary policy, the capital adequacy of the banks do not pose any major solvency issues in the immediate future.
A fair share of press reportage in India aligns with the possibility of global shocks threatening Indian economy, through the evaporation and reversal of capital flows . To me, this is not a short run possibility . The comfortable forex reserves and many more Indians on flight to different global destinations will certainly do their bit to combat such shocks. The only way a major exodus of capital can happen if we fail ourselves. In other words, if we collectively do not fail ourselves, foreign capital will dance to Desi ( read Indian) tunes.
Posted by sunandoroy at August 22, 2007 05:59 AM
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