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Economy

Indian Housing Loan to Income Ratios at Highest Share in Three Years. Will 2015 Be The Year of Reckoning?

Loan to Income ratios seem to be on the uptick for new housing loans, and at the highest levels since December 2011/March 2012.

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Source: RBI’s Macro Financial Risk document, Dec 2014

What’s good is that most loans (about 53%) are at a loan-to-income of less than 3. Which means if you have a loan of Rs. 50 lakh, you make at least Rs. 15 lakh or more.

(This makes complete sense; a loan of Rs. 50 lakh, you would pay Rs. 50,000 per month as a loan EMI, which translates to 40% of your income)

But what’s worrying is that 47% of loans are going to pay more than that!

Nearly half of all new loans are at higher values. Which means, people are paying more than 40% of their income (and this is pre-tax income, mostly) to service the loans.

12% of all new loans have an LTI or 5 or more. Let’s consider a housing loan of Rs. 50 lakh (5 million). An LTI of more than 5 means you’re giving the loan to a person who makes Rs. 10 lakh or less.

At the current rates of interest, this loan would cost the person Rs. 50,000 per month (EMI) which translates to Rs. 600,000 per annum. That’s more than 60% of the person’s income!

This is scary indeed. (What might justify it today is that some of these loans may not be fully disbursed – i.e. the property is under construction and the money will be given over many months. However, if the person’s salary doesn’t increase substantially, LTI’s will continue to be high)

And High LTI’s are seeing increasing market share

We’ve put guide lines on the chart above to see how much the market shares of Q1 are, relative to the past. As you can see, the LTI numbers are the highest since 2011-12.

An increasing LTI and falling asset prices (most large city real estate is on a down turn now) means just one thing: Banks need to be sure that property owners will repay even if the property loses value. The west found out the hard way in 2008 to 2011 that this is definitely not true. What will we find? 2015 is going to have some answers.

Note: The banking system might increase the “value” of the houses they lend to, because the appraisers are encouraged, in general, to hike up price values so the loans can be granted. There’s no real price comparison so it’s one person’s opinion against another, so there’s no real way to know. This is why we haven’t really bothered with the “Loan to Value” metric, which shows that LTVs have been falling for new loans. But even that metric is showing an increase in Q1.

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  • Tarun Dua says:

    These are not no-recourse home loans. They are guaranteed by future salary income of a homeowner. Only case in which the loans would end up becoming distressed is when there is no income to service the loans.
    -Tarun

    • In theory, yes, but if the house is under construction, the builder doesn’t deliver (because he runs out of money) then the borrower will refuse to pay, and likely courts will side with him saying you recover first from the house itself and only later from the borrower. If borrower does not have wherewithal to pay (lost income etc) then banks will have to take a hit, or go through lengthy court process to expedite.
      These are non-recourse loans of course, but in a system wide crisis we will have everyone siding with the “poor” borrowers…

  • piyush says:

    Took me a couple of minutes to figure out the chart. Each higher line is cumulative of the lower ones. Well, first cuff data seems unreliable to me. Why the spike in Q3 2011-12? Either people suddenly started taking much higher loans relative to their income size, or their income just suddenly dropped quite a bit and miraculously rose back in next two quarters?
    Does this only include mortgage data or also Loan Against Property? Q3 2011 was when equity prices were crashing and maybe some people really desperate for cash took out large Loan against property. If promoters were doing this, that can skew the data. The Loan values would look large relative to their incomes as most of their actual income would be in their companies. Their personal income statements would only reflect dividends/capital gains and salaries. But they would still be able to borrow substantially by pleding their shares. Plus the large loan sizes would totally skew the overall LTI ratios.

    • I think a housing loan is different from an LAP, and the RBI classification of that would be a different personal loan.
      Spike in Dec 2011 is high but that could have been becasue the real estate market was peaking at the time, and RBI tightened underwriting standards immediately after that.
      Housing loans depicted above are only NEW loans taken only to finance the house itself (so putting house as collateral for a loan will not count). So I doubt the larger promoter pledges will count…

  • Kaushik says:

    Real estate is a status quo internationally and we are catching up to that situation. In developed countries, ppl just hand over the keys and say bye to the bank. And bank’s bad loans are monetized by the central bank of that respective country and everybody winks one at a time. We have to remember, deflation is not for anybody’s interest as presently as you correctly pointed out. Unless in a true capitalistic way, a bank is failed and a big number of ppl loses their shirt, nobody will ever utter a word to reduce the property prices. The point of inflexion will be when the new loan creation vs existing portfolio value catches a trend of falling down and system is not sustainable anymore.

  • Rudra says:

    Hi Deepak,
    Typically in cities like Bangalore, people have large rental incomes, which are mostly undeclared. Thus while LTI on paper appears > 5, in reality the strong (and increasing) cash flows from rental income make up for a comfortable payment for the borrower.
    Many people have bought their 2nd and 3rd properties at places where good rental income is ensured. Vicinity of large IT parks. Although this may be true for places like Mumbai/Bangalore and not for smaller cities, my guess is that a good chunk of high LTI loans belong to the larger cities.

    • I don’t think rental income is of significance, typically new loans have <2% income as rent, even if they were rentable. That means a loan of 1 cr. may give a property annual income of Rs. 2 to 2.5 lakh, which doesn't add enough to income to make the LTI significantly lower.

  • Wow. what a wonderful compilation !! thanks Deepak.
    It may the just tip of ice berg like western kind of housing bubble. It is also clear tell tell that Salary reduced after taking Home Loan / Pinkslip after loan/ are banks negligence in calculating their risk?

    • Don’t know about negligence but they are surely taking this with their eyes open. LTI of more than 3 is scary, and that’s nearly half of all new loans!

      • Rudra says:

        The comment was more on rental income increasing the serving capability of the loan for the borrower rather than bringing down the LTI significantly.
        Assuming, 80% LTV, for a housing loan of Rs. 50 lakh, assuming property value of 65L and rental income turns out to be 2.6L at 4% yield.
        [Assuming a 4% rental yield as per this article (http://www.livemint.com/Money/7909Ml3q8TWyCuawO1A9sN/Consider-rental-yield-while-buying-property.html)
        “…According to Om Ahuja, chief executive officer–residential services, Jones Lang LaSalle India, Mumbai and the National Capital Region typically have rental yields lower than 2.5%; Hyderabad, Kolkata and Bangalore are all in the range of 3-4%…”]
        At the current rates of interest, this loan would cost the person Rs. 50K per month (EMI) which translates to Rs. 6L per annum.
        Thus for the same borrower (a person who makes Rs. 10 lakh) adding the rental income of Rs 2.6L the LTI reduces from 5 to 4, but more significantly the EMI outgo reduces from 60% earlier to 47%.

        • Rudra – 4% yield is theory, In BLR where I live yields are of the order of 2% – 2.5% max.
          Most new housing loans are even lower. For a 65L property you would be lucky to make more than 1.5L per year. A 5 LTI will come down toa 4.34, but that’s still very very high. That means that even if you get 15K per month, your 83K per month salary goes to 98K, but you have to pay 50K out of that for EMI – a 50% payout!
          If you reduce 5 to a 3.5 LTI to start with, also only falls to 3.16 LTI, which again is high, IMHO.
          With rent you have the risk of non occupancy, the maintenance costs etc. which usually nets out quite a bit as well.
          And in fact most houses at >3LTI will see only a marginal improvement if they give it out for rent, but I am fairly sure that these are under construction properties (given the high LTIs) and therefore will not be rentable at all….so the whole question will be moot.

        • Akshat says:

          Deepak, where do you stay in Bangalore ? Looking at the sale/rent rates in Bangalore, 4% or so looks fine to me. Also, in Bangalore we have the 10 months deposit not present in other cities which will bring up the rental yield.

        • Good point about the 10 month deposit. I stay near Sarjapur Road where you’d struggle to get 3% (I think). But didn’t think of hte deposit addition of course – though if you pay 25K per month your 2.5 lakh deposit would at best bring in 25K, which adds a month return.

  • Ramesh says:

    Indian banks are very short sighted it seems… your article on Bhushan Steel Ltd show that its been a clear juggling thats been made till date to be a regular re payer of loans.. Su-Raj diamonds was an other case while Kingfisher as been old case… White collar manmaani… after all its our money they are playing with…
    They are sanctioning loans for flat constructed out of the Plan very rigorously to meet the targets… small and mid level builders are closing and opening new firms after completion of every other projects… no one can find them if things go wrong later… banks take a hit and clearly passe them on to its customers…
    A e-registration project called ambicity selling plots near Hoskote Bangalore got sanction from all major banks where in a cosmetically modified land is sold at 4500 per sqr ft… where in an hectare of land is costing JUST 40lacks/hectr… who is asking???

  • lohit says:

    There are anecdotal signs of the housing correction. Some places in NCR have seen a 30%+ fall in prices. http://articles.economictimes.indiatimes.com/2014-12-25/news/57395379_1_rs-13-crore-60-crore-jll-india
    The low rental yield usually indicates overvaluation.
    US – long term stock market PE average is 15. Long term house-price/rent ratio average is around 14. (indicating perhaps that people treat these asset classes fairly similarly when valuating them).
    India – Long term stock market PE is 17. Current price/rent ratio for homes is about 40. Makes one raise the eyebrows.

  • Deepak says:

    Deepak,
    We do not have joint filing in India – so I have enough friends who have double income in the family and loan is serviced by income and the spouse’s income is used for the rest. Also we friends kept asking what is driving this behaviour – a few answers – for the software gang – money from overseas posting goes in large pre payments, for the financial services guys – variable pay is used – there is money which is not in the monthly salary slip you see… maybe we need to dig deeper – a >50% LTI seems very high..

    • Deepak, I think these are rank exceptions. A 50% LTI will consider all of there parameters and people will put in a higher income figure (or take loans in joint names to lower LTI). All that prepayment thing is simply not happening at any serious scale, from the data I’m seeing (it might be an odd case once in a while)

  • Avinash Pai says:

    Deepak – Interesting charts. A few points:
    1. Anticipated Interest rate declines and consequent EMI decrease on account of lower borrowing rates in future may have prompted lenders to relax the LTI over the past few quarters. Hence seeing the uptick in LTI?
    2. Are these LTIs dynamic in that they aggregate loan stock+additions-deletions or look only at loans given during a quarter? If these are only new loans then point 1 above is probably valid.
    3. I also hear about loan growth slacking for lenders. Probably a function of high asset prices and high interest rates. This may have compelled banks to lend at diluted LTAs since home loan takers have lower default rates?