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India Property
2Q Monetary Policy Review:
Pre-empting Systemic Risks
Quick Comment - RBI’s 2Q monetary policy review
measures appear to be selectively targeting risky
market practices – teaser loans, 10/90 scheme, high
leverage – and hot markets so as to mitigate systemic
risk (and not to hurt on-going recovery) and to slow
asset price inflation. We remain constructive on the
sector in view of the ongoing recovery and stable local
macro background (8.5% GDP growth, 5.5% inflation for
Mar’11). We remain OW on DLF, IBREL and SDL.
Announcement 1 – Loan to Value (LTV) ratio for
housing loans should not exceed 80% (versus no ceiling
earlier). RBI seeks to prevent excessive leverage.
Implication – Based on market feedback, we believe
that mortgage funding supports roughly 60-80% of home
sales, most of which are done at 70-75% LTV. Therefore
this measure should hurt select (and small) market
segment such as 10/90 scheme in Mumbai (IBREL,
Lodha), but improve the quality of sales. This should
drive developers to give direct and transparent
discounts (price cuts) rather than financial structuring.
Announcement 2 – Increase in risk weight for
residential housing loans of Rs7.5 mln and above
(irrespective of LTV) to 125% (from 75% and 100% for
LTV less or more than 75%). Implication - The measure
appears to be targeting ticket size of roughly Rs10 mln
or more, which is common in ‘hot’ markets of Mumbai,
central Gurgaon and metro city centres (where prices
have risen the most). If banks were to pass the entire
impact to homebuyer, we estimate 50bps increase in
mortgage rate for 25% higher risk weight (for a limited
market segment). While a marginal impact on demand,
we believe RBI is sending strong signal to developers to
discipline property prices in certain markets.
Announcement 3 – Provisioning for ‘teaser rate’ loans
increased to 2% (40bps earlier) in view of the risk
assessment of inadequate paying capacity, once rates
reverse to normalized levels. This should effectively stop
the practice of ‘teaser loans’ in our view.
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