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Saving For a Space Ship

India's subprime mortgage mania can quickly turn to panic  

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India's subprime mortgage mania can quickly turn to panic  



Affordable housing in India is a corner of finance that’s expanding almost 40 percent a year, and even more for some hyperactive lenders. The borrowers are subprime, their collateral is of dubious value, financiers’ cost of capital is rising, and yet the government is whipping up a home-buying frenzy.

Investors beware. You’ve seen similar stories play out before; this one, too, isn’t likely to end well.

But what exactly is the situation?

Suppose you’re a production supervisor in a footwear factory, earning the equivalent of $800 a month. You decide to buy your first apartment with a $13,000 loan. Normal mortgage rates are around 9 percent. You, however, effectively pay only 5 percent. The government tops up the remainder to your financier every month. You can buy a house that’s as expensive as you want. So long as it’s not bigger than 200 square meters, the first $13,000 loan is at 5 percent.

You’re doing great, until your boss figures out there’s no way he can avoid paying the new Indian goods and services tax, or GST. Since his only source of competitiveness so far was tax avoidance, he closes the factory. You’re fired, but you still have the house. And suddenly it’s a problem for the finance company, its investors and the taxpayers ...


ICRA puts housing-loan companies’ external-financing requirements at between 77 to 120 billion rupees over the next three years. Some of the bigger players may even hawk retail bonds. Investors will soon have many hands tugging at their sleeves.

But they have to be careful here. If the U.S. subprime mortgage meltdown is any guide, plenty can go wrong. Hundreds of millions of Indians crave a roof over their head they can call their own, but what they need first is a job that’s available today and has some assurance of being there tomorrow.

Until that problem is fixed, the interest-rate subsidies are an act of untimely kindness.



Edited by Saving For a Space Ship

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