>India Financial Services (MORGAN STANLEY)

Dependence of Mortgage Growth on Property Prices = Sharper Slowdown Ahead

Quick Comment: In this note, we try and present a simple argument on why mortgage growth for the industry will be extremely weak in F2010 and possibly F2011. Even if we don’t consider slowing economy and rising unemployment, the fall in property prices itself will cause a sharp deceleration in the market. In India, there is no property price index, so it is not possible to get an idea of exact price decline. However, anecdotally it appears that prices have come off by about 20% in the last few months and will likely decline further. New loans (disbursements) are obviously a function of mortgage volumes and prices. With prices declining, volumes have to move up sharply – just to keep the new loans constant. That is unlikely to happen, implying that new loans will contract in F2010 for industry. There will be players, like HDFC, that are likely to gain market share, but overall industry will see a decline. While we are focusing on mortgages in this note, the slowdown is likely to be intense for all other loans, as all asset prices have come off sharply. In fact, in our view, there is a very high probability that loan growth will be in the single digits for Indian banking system in F2010.

Most of the growth in mortgages in the past 5 years was driven by the rise in property prices, in our view. We are handicapped by lack of price data. But we do an approximate analysis, using some data from HDFC. It gives average value of mortgage outstanding; in F2003 this was Rs.370000, which increased to Rs. 1.4 mn in F2008, a CAGR of 30%. This is for the entire loan portfolio – implying that the increase in value of new mortgages would have been even greater.

To see full report: INDIA FINANCIAL SERVICES