Foreclosure has never been a predominant reality in the Indian housing market. The Coronavirus lockdown leading to job losses and salary cut nevertheless threatens to make this a reality. Ravi Sinha does a dipstick analysis to understand the inevitability of foreclosure in the Indian housing market and ways & means to tide the potential crisis at the doorsteps.
Nothing had scared the Indians with the costliest purchase of their lives, a house, as much as the Coronavirus hit economy. The buyers having already committed are re-calculating their financial commitments. The prospective home buyers are maintaining the social distance from the housing market in the literal sense of the term today.
Beyond the debate over the standing inventory, standstill sales, liquidity crunch and broken supply chain of the business, the sector has today got a bigger potential threat at the doorsteps – Foreclosure.
The statistics are scary for any salaried class across the cities of India who has an EMI to pay for his home purchase. The Indian Chamber of Commerce has estimated that the real estate would be witness to 65% defaults from the buyers of under construction projects due to Coronavirus hit lockdown. The estimation is not without its logical reasons. A CII snap poll of the CEOs finds that 52 percent of the companies surveyed foresee job losses, in their respective sectors.
The proportion of jobs that are expected to be cut are quite staggered; with scary outlook all around. 47 percent companies expect less than 15 percent job loss and 32 percent of the companies expect to shed 15-30 percent of jobs once the lockdown ends.
This only reminds of the great recession of 2008 when in US 3.1 million foreclosure were filed in 2008 alone. The US government had then allocated $900 billion to loans and rescues related to housing.
In India, sectors like aviation, travel, hospitality, real estate, retail, manufacturing and automotive are worse affected and the employees over there would face job losses. Even with a conservative estimate of just one quarter lockdown leading to 15-20 percent job losses and salary cut of 30-40 percent of the work force, the affect would be severe with half the working population that buys the house across the top 10 cities of India.
The salary cut across the industries are in the range of 20-30 percent, as of now. Now India’s gross saving is 30 percent, as compared to China’s 46 percent with similar high housing inventory. However, India’s household saving is just 18 percent. This saving rate of 18 percent, that is 15 years low, could lead to many loan defaults, including the housing loan which is the single biggest EMI burden on most of the urban Indians.
“The real estate sector, which is already in a slump since last year, is presently experiencing almost 65 per cent payment default from customers paying the instalments linked to construction. This is because many customers were requesting developers to allow them to delay their payments as they were facing liquidity crunch due to lockdown,” says ICC Director Rajneesh Shah.
Policy relief to prevent possible foreclosure
Realty sector sees 65% default in payment from customers, Indian Chamber of Commerce
Just one quarter lockdown leads to 15-20% job losses and salary cut of 30-40% employees, thus affecting half workforce
Aviation, travel, hospitality, real estate, retail, manufacturing and automotive sectors to lose jobs
Salary cut in the range of 20-30%, India’s gross saving is 30% (China 46%) and household saving is 18%, that is 15 years low
Defer loan payment for a year in case of job losses
Restructure the loan in the event of salary cut
Longer tenure of loan repayment with lesser EMI burden
The developers are nevertheless advocating for a positive outlook. Amit Modi, Director of ABA Corp thinks it is subjective and one has to wait to see which ticket size the impact would be felt in. According to him, it is doubtful that there would be defaults and foreclosures across the sector.
“I don’t see major job losses in the market either. There might be some salary cut among the opportunist players. Moreover, you have to understand that a lockdown is not new to the developers. For reasons ranging from the NGT to various court rulings, builders have faced lockdowns. However, a comprehensive global lockdown will have its after effects to some extent but not to the extent of hurting the job market for the next few years. I feel, even if the lockdown is partially relaxed by mid-May and production of goods is restarted, then we don’t need to overreact,” says Modi.
Developers optimism apart, the moot pint today is what is the way out. How to make sure that the foreclosure does not become a reality in India? This is a serious issue today and foreclosure could derail the housing market into deep stress for the next few years. In a country with already 7 lakh unsold units, the added stress of mortgage defaults could be an inflicted injury, if not prevented.
Experts believe the government must announce a package for the home buyers where one could defer EMI payment for a year in case of job loss. In the event of salary cut, the home buyer could avail restructuring of loans with lesser EMI burden and longer tenure to repay. A comprehensive bailout package for those facing job losses or salary cut is beyond the means of the government and the Indian economy.
Naushad Panjwani, Regional President of Indo American Chamber of Commerce has a word of caution when he says that loan defaults could hit both the developers as well as the home buyers.
“The developers likely to receive construction-linked payments would be worst hit. It would be a vicious cycle and the government must step in to defer the EMIs in the wake of job losses and restructure the EMIs in the wake of salary cut,” says Panjwani.
In a nutshell, the workforce across the top cities of India is weathering the storm with the job losses and the salary cut. Their inability to serve the housing loan could wreak havoc on the overall economy in general and the housing market in particular. It is time the government comes out with a rescue plan, if not the bailout package.
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