Why India’s growth should stay resilient
The developed world phenomenon of rising rates impacting growththrough a slowdown in property markets & corp spending won’t happen in India. Indian property cycle has multi-year pent-up demand and is more dependent onpricing sentiments (now strengthening) instead of mortgage rates.
Corporate sector leverage is at a cyclical low & corp spending will likely rise. India’s GDP growthshould, at best, witness a marginal slowdown due to rising rates.
The Indian housing cycle is not dependent on mortgage rates… The Indian housing market is different. Unlike in the western world, even at the lowest level of mortgage rate (6.5 per cent a year ago), residential rental yield of 0.3 per cent is too low to make a compelling investment case, unless a price appreciation angle is brought in.
Property price appreciation was on an average 2 per cent CAGR over 2013-2021 and was not compelling either, evident in < 1 per cent sales volume CAGR. Prices have started moving up in the last 2 years which is now pulling in the pent-up demand driving volumes.
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The Indian housing cycle, therefore, is not so much dependent on mortgage rates but on pricing traction which we believe should sustain for the next 4-5 years given the pent-up demand and 12-year low inventory, ensuring pricing power.
A significant consolidation in the developer industry also means that the supply is in the hands of more mature and seasoned players. RERA (Real Estate Regulation Act) has also put several checks and balances in the system and hence an overnight surge in supply is not possible.
…and history proves that. During 2004-2012, which was the best time period for Indian property markets by volume and pricing (prices moved up 15 per cent CAGR) saw mortgage rates move up from 8.0 per cent to 11.0 per cent. Similarly, during 2012-2020, the mortgage rate moved down from 11 per cent to 7 per cent and volumes declined 30 per cent. It is clear to us that mortgage rate movement is not the key driver for Indian property markets.
Mortgage rate vs property cycle. Source: Jefferies, SBI
Recent housing data corroborate the theory. The mortgage rate has increased from 6.6 per cent (Jan 22) to 8.5 per cent now, and housing volumes continue to rise, +25 per cent on an annualized run-rate basis. The mortgage industry has grown by 21 per cent over the last 12 months.
Residential sales vs mortgage rate trend. Source: Jefferies, SBI, PropEquity
Pvt corp debt to GDP ratio fell substantially in the last decade. For other top-10 economies in the world, private corp debt to GDP ratio rose by ~20 ppts over the last 10 years to ~103 per cent of GDP.
India is much lower at 53 per cent of GDP. India went through a period of corporate spending slowdown due to a series of events viz. NPL cycle, bankruptcy law, disruptive GST implementation, demon etc. The corporate D/E ratio is now at a low of 0.6x and we believe the negative impact of these events is now fully in the numbers.
Source Jefferies, BIS
Corporate spending now showing initial signs of recovery. Short-term rates in India have moved by ~2 ppts from the lows and assuming another 1 ppt increase, theincremental impact of higher interest costs on GDP would be 1.8 per cent (calculated as incremental interest outgo as a per cetn of nominal GDP).
The same ratio for the developed world would be a substantial 4-6ppts of GDP, on much lower growth, assuming everything else remains the same. But in India’s case, fundamentals are actually improving (visible in higher credit growth, orderflow growth etc) and hence higher interest rates won’t reflect in lower corp spending, in our view.
Credit Growth. Source: Jefferies, RBI
Disclaimer: Mahesh Nandurkar is managing director, Jefferies, Views are his own
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