Saturday, March 08, 2008

Are Home Loans Being Diverted to Builders?

A nasty corollary of cheap loans is that instead of funding the dreams of home owners, the loans are being diverted to builders and developers. This could be another reason why builders can continue to hold on to inventory, resulting in huge developments priced at inaccessible costs.

Take the Nahar group for instance, which has entered in to an agreement with HDFC to pay a home buyer's EMI until the time the flat is constructed, which takes about 2-3 years. You pay the 20% down payment, and they pay the EMI for 3 years. Nice idea, except we do not know if the flat which you are paying for is actually worth the price. Remember there are no free lunches, and hence all the costs are written in to the deal.

This is similar to what triggered the US boom in real estate, when loans on exhorbitant properties were sold to those who could ill-afford them in the long run. Who says we do not have a subprime crisis looming?

This specific case of Nahar, simply means, HDFC funds the construction of the building by paying the money upfront to the builder, which borrows money at home loan rates meant for individual home buyers. This means the developer itself has become a home buyer in its own construction.

Completely laughable! In any other business, Nahar would be paying at least twice this interest rate. As I see it, this is a clear loophole, which many developers in connivance with banks are exploiting. The Raheja and Nirmal groups are also reported to be using this route to fund their projects, in which they are offering to pay the EMI for potential home buyers.

Wake up, Mr Chidambaram!

Read reference story in DNA

Posted by Eclectic Investor at 12:36 PM  

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IN PASSING

Consider how the crisis has unfolded over the past eighteen months. The proximate cause is to be found in the housing bubble or more exactly in the excesses of the subprime mortgage market. The longer a double-digit rise in house prices lasted, the more lax the lending practices became. In the end, people could borrow 100 percent of inflated house prices with no money down. Insiders referred to subprime loans as ninja loans—no income, no job, no questions asked. - George Soros in latest book


“When everything’s going up, there’s a feelgood factor and people tell each other how much their houses are going up at dinner parties,” says Professor Mark Stephens of York University’s Centre for Housing Policy. “Then the music stops, as it always does.”

“Last year, Japan was a more attractive market to put money in. If you look at the US, we can now get an internal rate of return of 25% there, so why would anyone want to come to India?” - a senior executive at an international financial services group, who did not wish to be named.

"Most people told us house prices never go down on a national level, and that there had never been a default of an investment-grade-rated mortgage bond, "Mortgage experts were too caught up." - John Paulson, trader, who bet against subprime market and made $15 billion.

The most puzzling are the real-estate projects of Parsvnath. Just have a look at the Pride Asia project near Chandigarh. They are asking almost US $300K-$350 K dollars for 2 bed room apartments. They have Villas in this project that costs more than US $1.5 million dollars. It is true that some people in India have that kind of money in India. However most of their wealth is black money and that can not be used to buy these properties. Obviously, these projects have been launched keeping NRIs in mind. - Sanjeev, comment from another site

Prachi Desai, aka Bani, the star of Balalji Telefilms's soap, Kasam Se, has been house hunting for over a year. She had almost closed a 2-BHK deal last year for Rs 1.5 crore in a Oberoi Constructions' building located at Andheri, Mumbai, but when she went back to confirm it, she was asked to cough up Rs 2.61 crore. Since then, she is still house hunting. - Mumbai Mirror

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