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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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