Costs of housing has only been on the upmove due to scarcity of land and concentration of businesses in few pockets. To make housing affordable, infrastructure development is the path to adopt and encourage businesses migrate to areas where land and labour are cheaper. In the bargain, the government can ensure distribution of people over a wider geographical area, says HDFC's vice-chairman & CEO, Keki Mistry, in an exclusive interview with OP Thomas.
How has been the case with HDFC under the high but stable interest-rate era?
Our average loan size is about Rs 22 lakh. We take into consideration the family income and not just the individual income. Our loan to cost ratio being 65% we are typically discussing properties where average value is around Rs 36 lakh.
HDFC's focus is just below the middle income category class in the home segment. Such homes are usually in smaller towns or tier II and III cities and the peripheries of large metros. This does not mean we do not cater to the other income category but our focus is more on smaller cities. In cities like Mumbai, property prices can range from Rs 3500-4000 a sq ft in the extreme extended suburbs like Boisar to over a Rs 2 lakh in southern parts, but the mass demand is from smaller size loans.
The multiple of the annual income of the average customer vis-a-vis the cost of a house has remained stable in the last ten years. It has neither gone up much nor come down. When you also look at interest rates being high, you also need to take into account the effective rates. What has happened is that prices (of homes) have gone higher but income too has gone up. Affordability has remained the same. When you look at interest rates, which may be higher, do not forget the tax benefits. On the principal, there is a tax deduction of up to Rs 1.5 lakh and on interest, tax is deductible up to Rs 2 lakh. For example, if one avails a Rs 20 lakh home loan, say at 10.15%, and assuming the customer has no other savings like provident fund, or other saving instruments, the effective cost, after discounting the tax benefits can be as low as 4.2%.
...On defaults and restructuring in your loan portfolio
There has not been many job losses in the system. We saw a shade of it though in October-December 2008 where a few did face job losses after the financial crisis came to the fore. However, in the last two or three years there have been no reported job losses though new job creation has definitely slowed down.As for defaults, on our individual books in past ten years, they have been lower than the previous year when you compare each quarter with the corresponding quarter of the year before. Seasonal defaults do occur like say during festive seasons or when people go on vacation etc, but non-performing assets in the last ten years have been shrinking or on the decline from the already low numbers that we have had historically.
Restructuring also occurs due to cases like death in the family or hospitalisation, stray cases of job loss but our policy is to help people. Over the life of the loan temporary set-backs do happen. If you look at the current year (April-June quarter), 86% of our housing loan portfolio comprises of individuals and the rest 14% are to non-individuals.
The new government under the Prime Minister Narendra Modi seems to be pro-growth. What is your take on the affordable housing under the new government?
My sense is that it can be a reality but obviously will take a little more time. Affordable housing may not be in the city of Mumbai but mainly on the outskirts. The problem with housing today is not the construction costs as much as the escalation in land prices which are significantly high. If one needs to really bring down property prices in say, for example, Mumbai, the infrastructure needs to be improved significantly. Create a road path over the sea that connects the north and south of the city with inlets connecting to various parts of the city and improve transport. Once this is done, one would need to create more schools, colleges, medical centres, hospitals, water supply, sewage lines and only then should buildings in the city be permitted to go higher which means more supply leading to pressure on property prices.
Property is like any other commodity. It is more a function of demand and supply. You have to create a supply, because demand is high and difficult to control.
Would that mean prices in Mumbai may not come down?
Prices can come down if land is made available at lower price. But being an island city and to ultimately bring prices down you need to create infrastructure. Our prime minister's policy of creating smart cities is a step in the right direction. Once smart cities are created, say on the outskirts of Mumbai, you will see lots of businesses from the city migrating to the new city due to cheaper land, labor and property. Once the ball starts rolling, people too will become mobile as jobs get created and one could ultimately have a wider distribution of people over a wider geographical area.
There are some interesting statistics—that the top 10 cities of India, which have 8% of India's population and only 0.1% of land area, contribute 15% of gross domestic product (GDP). Further, the top 100 cities take up only 0.24% of land area but contribute 43% of GDP and have about 16% of India's population. The point I am making is that if 43% of India's GDP can be generated on just 0.24% of land area, then if you utilise land more effectively by creating more cities, towns, business and urban centres, you can get a quantum leap in GDP numbers. Therefore, focusing on urban infrastructure is critically important. Now both these things we talked about—tackling inflation and creation of urban infrastructure—are capital-intensive. So you need to have a separate avenue to raise money.
How can one fund such capital-intensive projects when black-money generation, according to some, estimated at a $1trillion, continues to expand?
My suggestion would be that the government should consider a one-time amnesty for holders of black money. We know for a fact that there are huge amounts of unaccounted money with Indians in India and abroad. And we have to find a mechanism to bring that unaccounted money back into the system. You can charge them a higher tax rate, say 40%, but at least 40% of that black money can come into the system. Then you can set up something like a special investigation team, which could identify defaulters with the understanding that such defaulters could get into serious trouble. That would be an incentive for people to use the amnesty scheme. So 40% you collect as revenue, 60% which is to be paid back to the individual, you keep it with the government and issue a five-year interest-bearing bond against it. And that money can be utilised in the course of those five years—for funding infrastructure and for tackling inflation, etc. And at the end of five years, that money with interest gets paid back to the individual.
We have progressed a lot in terms of where the currency has stabilised. If you look behind, just around a year ago we were talking of our currency hitting 75-80 a dollar. But today, the rupee has stabilised and is one of the best performing currencies.
True, interest rate has not gone down but it has also not gone up and the country stands benefited by virtue of global oil prices, and once inflation is down we will structurally start seeing lower rates.
...On the merger of HDFC Bank with HDFC
From the long term perspective, it makes sense to merge the entities. There are also regulatory costs and we are in the process of evaluation on a continuous basis. Whenever shareholders of both the entities see the value proposition we will o ahead with it.