Indian Sub-prime Crisis 2020.

US Sub Prime Mortgage led financial crisis.
2006: Home Prices Fall
2007: Banking Crisis 
2008: financial crisis

India

2019 : A flat bought in 2014 / 2015 was sold at 23% less than the purchase; value depreciation. Seller is thanking his god and good luck.

2020 : Post Covid19 , July the same flat may fetch 30% less; if the seller can find a buyer.

Standard housing loan in India
Loan amount : 80 % of the value
Repayment period : 20 years
EMI : 1/3 of monthly income declared.

Today the value of housing asset funded is less than the total loan amount. The EMI paid for the first 8 years is more towards the interest and less repayment of the principal loan amount.

Even after 8 years of repayment, the principal loan amount is substantial.

India has already reached the sub-prime symptoms even before the covid lock down. 

Post covid lock down, there may not be prompt repayments. When the home owner realises the EMI payments exceeded the present housing asset value, it is likely he may default wilfully like in US 2008. The banks will have take possession and auction the assets.

Now there a lakh plus home assets where the homes have not been completed across India. When the home borrower defaults , there is nothing for the bank to take possession and dispose.

Dhakshina Moorthy K M

Home loan blunder!

The policy of liberal home loan disbursal based on the purchase value of the apartments, has been the fundamental cause of unprecedented rise in prices of land and in turn the homes.

Broadly the cost of a house or apartment consists of the price of land or real estate which is speculative; and the cost of construction, development charges, statutory deposits, project management fee etc. 

The primary emphasis of providing home loans at low rate of interest is to support the buying of homes by all. Instead the home loan policy now tends to support the whole price of the house; resulting in the financing of the speculative real estate at low rates of interest. This has resulted in easy availability of funding for speculation in real estate, over the years resulting in high land prices which is most unproductive and against the interest of the nation. It does not in any way, benefit the citizens nor it works towards the intended objective of providing housing for large population. It has given results, against the very objective of easy purchase of homes for all, to only the wealthy.

Can it be corrected? 

YES! By differential financing of home loans; financing the construction component at low rates of interest as it is practised now, limiting it to something like Rs 2000 per square foot; and financing the land component at the commercial lending rates of interest. 

This will ensure higher cost of finance for speculation and lower rates for the priority housing part. This would drive down the prices discounting the added cost of interest. In the long run, bring about availability of more houses at reasonable price levels.

Dhakshina Moorthy, K M