Housing Demand in the Context of Global Developments & Rising Inflation 32 nd Meeting of CEOs of Housing Finance Companies National Housing Bank August 30, 2011 Keki Mistry Vice Chairman & CEO HDFC Limited

Contents Global Global Developments India Indian Economy Housing Impact on Housing 2

More Uncertainty on Global GDP 3 Source: IMF, June 2011 Real GDP Growth (%)

The Downgrade & the Market Bloodbath August 5, 2011: S&P downgraded the US sovereign rating from AAA to AA+ with a negative outlook – Other rating agencies have chosen to maintain the status quo for US ratings – Since January 2011, other countries downgraded by S&P include Japan, Greece, Portugal and Ireland – US Debt ceiling has been raised 11 times since 2002 – Investors looking for safe assets will continue to buy US Treasuries – Dollar remains a global reserve currency – Flawed ratings were at the heart of the 2008 financial crisis Market reactions – The downgrade gave investors no information about US’s fiscal situation which the market did not already know, yet markets panicked – Fears of a double dip owing to high unemployment, weak growth, flat consumption and manufacturing, depressed housing starts, falling consumer confidence. – Equity v/s gold 4

Rising Debt to GDP Ratios 5

Commodity Prices Still on the Upsurge 6 COMMODITY PRICES Commodity prices impact countries depending on whether they are net importers or exporters of commodities. Average crude oil price in CY so far: US$ 112 per barrel In FY 2011 India imported 87% of its crude oil requirements RBI estimates that a 10% increase in oil prices leads to a 0.3% reduction in GDP growth Surge in prices of precious metals Gold viewed as a ‘safe haven’ commodity in times of uncertainty In August 2011, gold touched a record high, crossing US $ 1,900 an oz. Source: IMF

Struggling Global Housing Markets Knight Frank Q1, 2011 Global House Price Index key findings: Global house prices increased by only 1.8% in the year to March, the lowest annual rate of growth recorded since Q House prices in 25 of the 50 countries included in the index remained flat or saw negative growth in the first three months of 2011, compared to only 18 countries a year earlier. The weakest region was North America which saw a fall of 0.4% in values in the year to Q House prices in Europe were static in Q1. Asia remains the top-performing continent, recording 8.4% growth over the last 12 months. However, this is down from 17.8% a year earlier. The strongest performing countries were: Hong Kong, where the government is fighting to pull inflationary pressures under control; India and Taiwan. 7

Indian Economy: Strong Fundamentals 8 Sector-wise GDP Growth Service sector drives growth (%) * Source: RBI Annual Report,

Inflation: India’s Bugbear 9 Inflation remains the key macro-economic risk and challenge. Inflation has been above the 9% mark for 8 consecutive months. Initially inflation was driven by supply side constraints in agricultural commodities, but has now spilled to manufacturing and has become more broad-based. WPI stood at 9.2% in July 2011 compared to 9.4% in the previous month. Outlook: WPI unlikely to subside till September 2011 owing to higher minimum support prices for agricultural products and impact of the second round of fuel price increases. Commodity prices could come off if global growth remains weak. Average headline inflation for FY 12 is likely to be ~8.5 to 9% -- higher than RBI’s revised target of 7%. (%) FY 12: Citi projections

Higher Interest Rates Won’t Wish Away the Inflation Problem Repo Rate increases since March 2010 i.e. 300 bps increase Current*1 year ago Overnight MIBOR yr G-Sec yr G-Sec yr G-Sec I yr AAA Corp Bond yr AAA Corp Bond yr AAA Corp Bond Repo Rate How Rates Have Moved… Credit off take showing signs of slowdown Liquidity is still there Supply bottlenecks need to be addressed Will RBI pause on a further rate hike increase in September 2011? Bank Base Rates are currently between 10 to 10.75% compared to 7.5 to 8% a year ago. % As at August 25, 2011, Source: FIMMDA

Rising Inflation & Interest Rates: Impact on Housing There is a general notion that rising interest rates and inflation – Leads to a slowdown in growth of housing finance; and – Deterioration of asset quality This need not be the case if: – Credit appraisals are done prudently – Borrower has sufficient equity in the property – Loan repayments are structured where the principal component of the loan starts gets repaid immediately (unlike interest only loans) – Impact of rising interest rates on EMIs are minimised since incomes of most borrowers tend to increase over time 11

Housing Loans & Interest Rate Cycles 12 A floating rate housing loan is a long-term loan and over this period, there will be various interest rates cycles. A genuine home buyer will not defer his decision to purchase a home based only on interest rates. They are more sensitive to changes in real estate prices and their own levels of confidence. Indians are generally debt averse and prefer to prepay, irrespective of interest rate cycles. Downward cycle Interest Rate (%)

High demand growth driven by: – Improved Affordability Rising disposable income Tax incentives (interest and principal repayments deductible) – Increasing Urbanisation Currently only 31% of Indian population is urban Urbanisation expected to increase to 40% by 2030 – Favorable Demographics 60% of India’s population is below 30 years of age Rapid rise in new households Low penetration Housing shortage estimated at 24.7 million units – Rural:14.1 million units, Urban:10.6 million units (Census Report) Demand for Housing will remain Robust in the Long Run 13

Improved Affordability 1 Lac = 1,00,000 Representation of property price estimates Affordability equals property prices by annual income 14

Low Penetration Implies Room For Growth MORTGAGES AS A % OF GDP Source: European Mortgage Federation, 2009, World Bank, 2008 & BCG Banking Report,

Issues for Consideration Need for more affordable housing projects rather than high-end luxury projects – Developers need incentives to encourage affordable housing projects, such as single window clearances for such projects Welcome step by NHB to examine LTVs and capital requirements – Risk weights should be lower as LTV goes down due to loan repayment – Will provide capital relief to lenders NHB may consider – Exemption for HFCs for XBLR filing – Priority sector lending – indirect finance to be increased to Rs. 25 lakhs from Rs. 5 lakhs 16

Housing Finance in an Environment of Uncertainty Volatility and uncertainty to continue in the global economy and India cannot be insulated Demand for housing loans to sustain in the long run No substitute for prudent lending norms Avoid asset liability mismatches 17

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