Housing portfolios resilient to property price volatility: CRISIL

According to CRISIL, Steep price increases of residential properties in select pockets in Mumbai, northern capital region (NCR), Bangalore, Chennai, Ahmedabad, and Hyderabad have created fears of a price bubble in residential property, with possible consequences for mortgage financiers' asset quality.

International experience of home price movement reveals that most rallies in home prices end in soft landings rather than abrupt drops. A sharp drop in home prices in various countries has usually been a result of an industrial recession, followed by a population exodus from the area; such phenomena are therefore usually localised in their impact.

According to Krishnan Sitaraman, head, financial sector ratings, CRISIL, "CRISIL's analysis indicates that the likelihood of a widespread slump in property prices is small in India, and the impact of such a slump, if any, on mortgage portfolios' asset quality on a systemic basis will be manageable."

CRISIL believes that most of the current demand for residential properties in India arises from genuine demand from buyers. Adds Sitaraman, "The persistent demand-supply gap for residential housing, favourable demographics, rising affordability levels, availability of attractive financing options, as well as fiscal benefits on availing a home loan are the key drivers supporting the demand for residential properties and the resultant uptrend in property prices." Hence the international experience of soft landings seems more likely to occur in these cities rather than an abrupt drop.

CRISIL sees cushion built into Indian housing portfolios in terms of average effective loan to value ratios (LTVs) being higher than the documented LTVs, diversification across geographies and income segments, and expectations of conservative borrower behaviour. CRISIL believes that from a systemic viewpoint, this cushion is a reasonable mitigant for any significant deterioration in asset quality of mortgage financiers even in the event of a substantial reduction in home prices.

CRISIL has analysed the scenario of a sudden one time 30 per cent drop in property prices from the current levels in the top six cities in India, which account for 40 per cent of the incremental disbursements of key players. CRISIL's analysis reveals that this will result in losses only to the extent of 0.64 per cent of the aggregate mortgage portfolio. This, in turn, translates into an annualised credit loss of about 11 basis points, an impact that should be manageable from a systemic viewpoint given that most banks and large housing finance companies have a ROA (return on assets) of over 1 per cent.

CRISIL therefore believes that even in the unlikely event of a sharp drop in property prices in the areas that have recently seen maximum appreciation, the systemic impact on the asset quality of housing loan portfolios and profitability of mortgage financiers should be manageable.