US Home Loans vs. Indian Home Loans

Swaminathan S Anklesaria Aiyar in The Sunday Times has written a great article by reasoning why a Subprime mess is not likely to take place in India. Is this definitely an eye opener.

Read the article here.

Also, I feel he’s a great writer and some of his earlier articles are also gems. So please find the list of other articles here.

Here’s a small excerpt.

A housing boom-and-bust has engulfed the US financial sector in crisis. India, too, has experienced a runaway real estate boom, which in a few areas is going bust. The share prices of real estate companies have crashed. Yet, India has no mortgage crisis or financial sector crisis.

Why not? Mainly because of the huge amount of black money in Indian real estate. This has saved the Indian financial sector in unexpected ways. Traditionally, US mortgage lenders checked the creditworthiness of borrowers, and then made the borrower pay at least 20% of the house value, loaning the remaining 80%. So, even if the price of the house dipped, it would still be higher than the bank's loan, and the borrower had an incentive to repay it.

Also if I may add, buying a house in India involves a lot of sentimental factors associated with it. The strong family ties, concept of a joint family or living with your parents also serve as a deterrent to just switching houses or walking away from one. While the amount of black (illegal) money in circulation in India is certainly not advocated it’s an interesting outlook into how the home loan market in India works.

Time to Cheer and Buy?

The US stock markets are pleased with better than expected earnings from Lehman Brothers. This is despite the fact that it has taken a hit of $1.8 billion. It has also assured investors that its not facing a crisis like Bear Stearns and is not insolvent.

The crisis at Bear Stearns also didn’t seem huge when it reported a loss of $854 million on January 8. The Fed for sure is taking steps to ease liquidity with UBS advocating a 100bps rate cut for things to smoothen out. But it should really be also taking care to prevent such liquidity crisis from happening again.

Our Indian stock markets will surely rally tomorrow based on positive cues from the US. Even though this is a thin ray of hope. So do we go out and buy the fundamentally attractive looking stocks? Yes wise men have always said - Buy on dips. But I guess the trend is negative and there is more to come. The subprime mess in the US is going to take some untangling. So we better be vigilant with all the data coming out of the US and not get foolhardy.

On why, if the US sneezes

… India can catch a cold. The phrase that if US sneezes India will catch a cold is very popular in the Indian media these days. It’s very true in the present global economy where businesses are no longer isolated from each other or from other parts of the world. This being evident by the hit taken by ICICI Bank. Especially true in the case of our services sector where now it has become one of the major contributors to India’s GDP.

The Oracle of Omaha, Mr. Warren Buffet has spoken. He says the US with a $9.5 trillion economy is in recession, even though technically it may not be, since it has not recorded two straight quarters of negative growth. This has to be taken seriously coming from a man whose organization’s per share book value has compounded 21% annually and who recently overtook Bill Gates to become the richest man in the World.

US GDP growth in the last quarter (Oct ’07 – Dec ‘07) has risen by just 0.6% and the IMF forecasts US GDP to grow by 1.9% in 2008. China on the other hand is looking at cosmetic ways of cooling down GDP growth. One of the biggest trading partners of the US is China and while in 2007 US exported goods worth $65.2 billion it imported goods worth a staggering $321.5 billion from China. That accounts for 40% of the exports from China. China has recorded double-digit growth in exports in almost every major sector to the US. If US growth is indeed slow; trade from both the countries India and China with the US will slow down. China would not get affected much as it’s anyway looking to cool down it’s booming economy but if it decides and grabs this opportunity to provide more value than India to the US it’s a cause for worry. China can very well force its muscle to get a bigger pie and India better watch its step.

One of the star performing sectors for India is the services sector, read IT and IteS, which is a big chunk. Already the local players in China are giving a tough competition for Indian players who want to establish a presence in China. Not that the Chinese aren’t experts at fields other than the core sectors. China’s search engine giant Baidu is giving tough competition to even the Internet behemoth Google.

While the Chinese growth has largely been government led, Indian organizations will have to find their own feet and keep going without the government’s help while they are busy playing their bureaucratic games.

As the Chinese say - “May you live in interesting times”.