Is RBI set to make affordable houses unaffordable?
(Oct 9, 2015)
|A A A
In this issue:
» Yet another over hyped IPO enticing you?
» A strategy to earn Income at Will
» Global market updates
» ....and more!
I bought my first house in 2005 for Rs 3 million. The house was located within an hour's commute from my workplace (quite reasonable by Mumbai standards). I shelled out an equated monthly installment (EMI) to the bank that was less than 60% of my net salary. And I was confident to repay the entire loan well before the 15-year tenure. The house was affordable.
What is considered affordable housing has changed dramatically since then. House prices in Mumbai have multiplied three to five times in the last ten years. And if you are a house buyer in the metro suburbs today, you need to add several more hours of travel time to your workplace. Your equated monthly installment is unlikely to leave you much disposable income. And your home loan burden might stay with you for the better part of your working life.
With all this in mind, the RBI's recent order to banks comes as a surprise. The central bank has directed banks to lend Rs 90 for every house costing Rs 100. The condition being that the house should be in the 'affordable category' costing Rs 3 million or less. That's a loan-to-value (LTV) ratio of 90%. An LTV ratio below 70% is considered low risk for the bank.
The RBI's objective to make houses affordable to everyone is noble. Keeping the political agenda aside, a shelter for every Indian is a must for a growing economy. But I am not entirely convinced of two aspects of this new policy.
The first is if a house costing Rs 3 million or less can be defined as affordable.
The second is if allowing banks to lend up to 90% of the purchase price of the house will make it affordable.
Forget Mumbai, there are hardly any metro cities in India today where Rs 3 million will get you a house in a choice location. Except tiny houses in far flung suburbs, this budget cannot accommodate any reasonable needs.
If the Rs 3 million affordability threshold is for people in smaller towns and cities, then we have a problem of a different sort. The average income levels in such cities are substantially lower than the metros. Hence, it is quite likely that even the Rs 2.7 million loan (90% of 3 million) will be beyond the average loan servicing capacity.
So we will have a situation where more urban Indians will buy houses in places they cannot live. In other words, they will be speculate that the house prices will go up enough to afford them a better residential location some day.
Or people who cannot afford to purchase houses will go ahead and buy one because 90% of the loan is the bank's problem!
There is yet another angle to the affordable homes problem. Truly homeless Indians will still find home ownership beyond their means. But existing homeowners of one or more houses will find it easier to invest and speculate on the affordable homes. Since the banks will be funding 90% of their speculative bet, they have little to worry about. And God forbid, if their speculation holds well, the 'affordable' Rs 3 million houses will soon become unaffordable.
Involving banks in social causes is one of the worst economic ideas. Like a bad investment idea, it may work in the short term, but it almost always ends in disaster. If the government truly wants every Indian to own a house, they should focus more on education and employment. Encouraging speculative, debt-fuelled home buying in India will not make houses more affordable.
Do you think getting banks to lend up to 90% of the value will make houses costing Rs 3 million more affordable? Let us know your comments or share your views in the Equitymaster Club.
--- Advertisement ---
Why Little-Known Companies Could Make You Big Returns...
Some little-known and barely heard of companies could be the star performers in your portfolio.
It's because these companies have a huge potential for profit. A potential unrecognized by most investors as of now.
And you need more than a magnifying glass to go through the details of such companies to pick the winners.
Believe it or not, Equitymaster has been researching and recommending such companies for more than 7 years now.
And our subscribers have made returns like 124% in 7 months, 217% in 3 years and 11 months, 250% in 2 years and more from such little-known small companies we've recommended.
So we now invite YOU also to be part of this amazing opportunity.
Just click here for full details...
The year 2015 so far has been a big year in terms of fund raising activity. And of course, the Initial Public Offerings (IPOs) have been at the forefront of this. Now, this is particularly true if the IPO is of a well known brand and of a big ticket size. Investors tend to go overboard in their enthusiasm to own a new business. Fear of losing out on the opportunity to own shares of a big business right from the start tends to cloud their rationale of investing.
Something of this sort is being observed in the upcoming issue of Coffee Day Enterprises (owners of popular coffee chain Cafe Coffee Day). Investors are intrigued about the fact that with plans to raise about Rs 11.5 billion, the issue will be amongst the biggest in past 3 years! Mind you; we are not giving out any view on this IPO here. You can read our detailed view on the IPO in today's 5 Minute Premium and IPO special report. But the point we are trying to bring to your notice is that too much optimism around over hyped IPOs tend to distract investors from their long term interest.
Let's look at the historical data of the performance of investments in the BSE-IPO index over the past 6 years.
Returns from IPOs in the long term
Going by the data, if one had invested Rs 100 in BSE IPO index in September 2010, it would now be worth Rs 134 (CAGR of 6%). This means even over the long term period of five years, the investors could not make money. On the other hand, an investment of Rs 100 in the index at the depth of the crisis in September 2013 would have fetched you Rs 240 by now (CAGR of 55%)! Therefore while there is no guarantee of every IPO making money even over the long term, the best businesses bought at reasonable valuations certainly do.
Long time readers will be aware of our caution in recommending IPOs. After all, there have been instances when the small investors have been mis-sold expensive IPOs using the carrot of big listing gains. Therefore, one needs to evaluate each IPO on its merits. That is considering its fundamentals and most importantly the valuations, particularly when the hype and mania surrounding an IPO is at its peak.
Asad Dossani, editor of The Daily Profit Hunter, joined us in 2010. As we've gotten to know him over the years, he's shared some interesting tales about his prior stint at MNC Bank. Asad was on Wall Street when the 2008 financial crisis hit global markets. This was a time when the biggest names in the financial industry were on the verge of bankruptcy and at the mercy of government bailouts. But while most of the big banks were reeling under their self-created crisis, a few were still making money. These groups made consistent returns...not huge but regular.
However, uncomfortable with the illicit practices at financial institutes in the West, Asad decided to leave the industry and instead help retail investors participate in the unique money making strategies he'd learned over the years. But before taking his best ideas public, he wanted to study the strategies in more depth and perform exhaustive back tests.
Today, when I watched the first part of Asad's new three-part Master Series, which reveals his latest and potentially most profitable trading strategy, it reminded me of the excitement I felt when he told us his tales from Wall Street.
I was amazed by the results of his back testing. The results of his strategy (going back the past five years) have a success rate of 98.3%! If, like me, you're curious to know more about this strategy...
The first part of the 'Income at Will' Master Series is already live. I strongly recommend that you watch it now.
At the time of writing, the Indian markets were trading in the green. The BSE Sensex was up by about 134 points or 0.5%. Gains were seen in metal and banking stocks while FMCG and pharma stocks were trading weak. The Midcap and smallcap indices were also trading firm.
"The person that turns over the most rocks wins the game. And that's always been my philosophy." - Peter Lynch
|| Today's investing mantra
Publisher's Note: Vivek Kaul, the India Editor of the Daily Reckoning, just made a bold call - Real Estate prices are headed for a fall. Well, if you are someone who is looking to buy real estate, or is just interested in the space, I recommend you read Vivek's detailed views in his just published report "The (In)Complete Guide To Real Estate". To claim your copy of this Free Report, please click here...
Today's Premium Edition|
Coffee Day Enterprises Ltd IPO: Our View
The market gears up for Coffee Day Enterprises Limited IPO. Should you invest?
| Get Access
|This edition of The 5 Minute WrapUp is authored by Tanushree Banerjee (Research Analyst) and Bhavita Nagrani (Research Analyst).
|DISCLOSURES UNDER SEBI (RESEARCH ANALYSTS) REGULATIONS, 2014
Equitymaster Agora Research Private Limited (hereinafter referred to as "Equitymaster"/"Company") was incorporated on October 25, 2007. Equitymaster is a joint venture between Quantum Information Services Private Limited (QIS) and Agora group. Equitymaster is a SEBI registered Research Analyst under the SEBI (Research Analysts) Regulations, 2014 with registration number INH000000537.
An independent research initiative, Equitymaster is committed to providing honest and unbiased views, opinions and recommendations on various investment opportunities across asset classes.
There are no outstanding litigations against the Company, it subsidiaries and its Directors.
GENERAL TERMS AND CONDITIONS FOR RESEARCH REPORT:
For the terms and conditions for research reports click here.
DETAILS OF ASSOCIATES:
Details of Associates are available here.
DISCLOSURE WITH REGARDS TO OWNERSHIP AND MATERIAL CONFLICTS OF INTEREST:
DISCLOSURE WITH REGARDS TO RECEIPT OF COMPENSATION:
- 'subject company' is a company on which a buy/sell/hold view or target price is given/changed in this Research Report
- Neither Equitymaster, it's Associates, Research Analyst or his/her relative have any financial interest in the subject company.
- Neither Equitymaster, it's Associates, Research Analyst or his/her relative have actual/beneficial ownership of one percent or more securities of the subject company at the end of the month immediately preceding the date of publication of the research report.
- Neither Equitymaster, it's Associates, Research Analyst or his/her relative have any other material conflict of interest at the time of publication of the research report.
- Neither Equitymaster nor it's Associates have received any compensation from the subject company in the past twelve months.
- Neither Equitymaster nor it's Associates have managed or co-managed public offering of securities for the subject company in the past twelve months.
- Neither Equitymaster nor it's Associates have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months.
- Neither Equitymaster nor it's Associates have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months.
- Neither Equitymaster nor it's Associates have received any compensation or other benefits from the subject company or third party in connection with the research report.
Definitions of Terms Used:
- The Research Analyst has not served as an officer, director or employee of the subject company.
- Equitymaster or the Research Analyst has not been engaged in market making activity for the subject company.
- Buy recommendation: This means that the investor could consider buying the concerned stock at current market price keeping in mind the tenure and objective of the recommendation service.
- Hold recommendation: This means that the investor could consider holding on to the shares of the company until further update and not buy more of the stock at current market price.
- Buy at lower price: This means that the investor should wait for some correction in the market price so that the stock can be bought at more attractive valuations keeping in mind the tenure and the objective of the service.
- Sell recommendation: This means that the investor could consider selling the stock at current market price keeping in mind the objective of the recommendation service.
If you have any feedback or query or wish to report a matter, please do not hesitate to write to us.
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringementDisclosure & Disclaimer:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.
This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.
This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, the same may be ignored.
This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.
As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use
, available here. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407