Tuesday, April 03, 2007

India's Mortgage Borrowers Face the Big Squeeze / at least one central bank isn´t kidding.....

when you read news like this one you know that the central banks has to do something.... http://tinyurl.com/2p3e44

wenn immer man solche meldungen liest ist es nur ne frage der zeit bis die notenbanken eingreifen....

Shares of Unitech Ltd., India's largest real-estate developer by market value, soared 26,869 percent during the past three years. Anant Raj Industries Ltd., a competitor, leapt 39,548 percent

April 3 (Bloomberg) -- The Indian central bank's monetary shock therapy has left the country's newly leveraged middle class gasping for breath.

Last weekend, ICICI Bank Ltd., which commands a 30 percent share of retail lending in India, raised the benchmark interest rate on all floating-rate loans, including mortgages, by 1 percentage point to 12.75 percent.

This move came on top of a similar increase in February, and a half-percentage-point one in December. Each time, the trigger was an unexpected preemption of financial-system liquidity by the central bank.

This steep escalation in the cost of home finance is deeply unsettling. Any monetary policy that causes real, long-term rates to move so drastically can't be called a successful one.

Will it reduce demand for new mortgages? Of course it will. And once that happens, the Reserve Bank of India might even pat itself on the back for containing runaway growth in bank credit. Goldman Sachs Group Inc. yesterday said the rate of expansion in unsubsidized commercial credit in India will slow to about 20 percent from 30 percent at present.

größer/bigger http://tinyurl.com/2ljmum

Yet, the victory will come at a heavy price. ( better than a bubble.....)

A new homeowner who took out a 2 million-rupee ($46,200), 15-year variable-rate mortgage, say, two months ago was better off as a tenant. His loan's maturity, according to ICICI Bank's ``impact calculator,'' has increased by about eight years.

> why take no fixed rate?

> warum keinen festzins?

Punishment for Homeowners
To the extent the large increase in home-loan rates are a direct result of monetary tightening, one wonders why the central bank is punishing homeowners even as the government is rewarding them with juicy tax exemptions.

>same could be said to almost any other country. even in germay we have tax breaks etc.

>das argument zieht nicht. gleiches gilt für fas jedes andere land.

There ought to be a better way to contain credit growth in the economy rather than by bulldozing the hapless middle class, which doesn't have the stomach for this kind of volatility.

Mortgage lending, which accounts for about 14 percent of the total unsubsidized commercial credit, is growing at an annual rate of about 32 percent, according to the latest available data. Some Indian banks have significantly more exposure to mortgage lending than others. Home Loans account for 51 percent of ICICI Bank's $27 billion in retail assets.

Credit growth, whose pace has barely slackened from about 33 percent a year ago, has prompted the central bank to bring out the heavy artillery.

In the past four months, the Reserve Bank has mandated as many as three increases in the cash-reserve ratio, or the proportion of deposits that commercial lenders must keep with the central bank as cash. Between December and now, the reserve requirement has risen 1.5 percentage points, with the most recent 50-basis-point increase announced on March 30.

>it has worked! india is underperforming almost every other index by a wide margin.

>es hat gewirkt. indien schneidet seitdem mit am schlechtesten weltweit ab.

Removal of Liquidity
This preemption of cash has removed about $10 billion of liquidity from the banking system. As a result, lenders such as ICICI are now scurrying to woo depositors by promising them higher interest rates. The rising cost of attracting deposits is, in turn, passed on to the retail borrowers, who are getting squeezed.

Better coordination between fiscal and monetary policy could have avoided the discomfort. The Indian government gives tax breaks that knock off a significant chunk of the effective borrowing cost on home loans.

By scrapping, reducing, or at the very least, suspending the tax breaks for new mortgages, the government could have curbed demand for fresh loans without hurting existing borrowers. A 200-basis-point increase in a mortgage rate in less than two months is unbearable even in a high-wage-growth country such as India. It translates into a 20 percent jump in what a family has to pay the bank every month, according to Credit Suisse Group research.

thanks to http://www.coxandforkum.com/

No Relief
The other option, equally unpleasant, is for borrowers to increase their own equity. According to a report last month by Credit Suisse Group's Mumbai-based analyst Aditya Singhania, a prospective homebuyer who was expecting to make a 20 percent initial payment must come up with an additional 15 percent of the loan value to keep the monthly payout unchanged from what he had budgeted for before a 200-basis-point surge in the cost of capital.

To that end, they have held monthly repayments constant for existing variable-rate borrowers and increased the duration of the loans. This strategy is now reaching its limit.

With monthly installments unable to cover interest costs, banks will have to seek more cash from the borrowers, who will have to curb other household expenditure to find the extra money.

No Rate Cuts
``We estimate that the current policy-tightening cycle is likely to reduce consumer demand considerably,'' Goldman Sachs economists Tushar Poddar and Mark Tan said in their report. Even then, there's very little chance of the Reserve Bank easing up on its hawkish stance in a hurry.

>finally there is at least one central bank that isn´t kidding......

>letztendlich gibt es zumindest eine zentralbank mit der nicht zu spaßen ist......

Domestic tight-money conditions may not dissuade investments by large Indian companies, which have easy recourse to cheaper overseas borrowings. As a result, the Indian economy may grow about 9 percent for a third straight year, almost ruling out interest-rate cuts in 2007.

The end to leveraged homeowners' woes may not come soon.

here is more from bill cara http://tinyurl.com/2ytm5p and http://tinyurl.com/35nzmd via http://housingdoom.com/

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Anonymous Anonymous said...

profound truth "no stomach for volatility". This is is of course true not just in India, only need to add.. "unless it is in upwards direction".... "the only way is up baby...."

3:55 AM  
Blogger jmf said...


6:04 AM  
Anonymous Anonymous said...

It's great to see you and others like Russ Winter cover this event. As an Indian, I am also happy with the handling of this situation by the Reserve Bank. Of course they could have started earlier, but unlike in the US or other mature economies, the signs of a bubble in India are confounded with the high levels of growth which makes it that much harder to figure out exactly what is going on.

I would like to note a few points about India. The fact is that large scale economic collapse will result in total chaos - rioting and violence, and set the country back 15 years. If the economy unravels, forget about globalization and reform. Unlike the West where the comfortable mainstream forms a bulk of the population with a small percentage of "poor", the converse is true for India. The "poor" control the votes (and yes, they do vote). No government can afford to ignore the conditions of the non-globalized Indian, and non-globalized Indians are really squeezed in the current economy. Therefore, the government & Reserve Bank will do their utmost to kill any runaway phenomenon. It's an issue not of economic comfort but of national security.

3:05 PM  
Blogger Mojo said...

Thanks for this post. The current pains are the result of skewed economic development in India, which means economic growth has not increased the earning power of many who are feeling the heat. I feel it is absolutely crazy that just a couple of years of high growth has brought in such problems which seem to go out of hand. God save Indians if India grows at same rate next five years.
Strange, the only two categories not affected by such rate increases are the politicians who can dictate their own salaries and the bureaucrats whose salaries are protected by inflation, they get two three hikes a year just on account of inflation!

9:19 PM  
Blogger jmf said...

thanks for your insight

11:11 PM  
Blogger jmf said...

more news

Wienerberger Plans First Indian Factory, Chief Executive Says

Wienerberger AG, the world's biggest brickmaker, plans to open its first factory in India next year as the country's economic expansion and population growth boosts construction of new homes.


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10:29 AM  
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