Investors have seen similar stories play out before. The last subprime crisis we witnessed had global implications. Admittedly, the Indian economy is nothing close to the US economy in terms of its scale or global scope. However, it has been moving up. And ignoring the situation in India (and the emerging economies in general) could be costly. Therefore, we do feel obliged to share this Bloomberg article with you.
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 who bore the subsidy.