US Home Loans vs. Indian Home Loans

Swaminathan S Anklesaria Aiyar in The Sunday Times has written a great article by reasoning why a Subprime mess is not likely to take place in India. Is this definitely an eye opener.

Read the article here.

Also, I feel he’s a great writer and some of his earlier articles are also gems. So please find the list of other articles here.

Here’s a small excerpt.

A housing boom-and-bust has engulfed the US financial sector in crisis. India, too, has experienced a runaway real estate boom, which in a few areas is going bust. The share prices of real estate companies have crashed. Yet, India has no mortgage crisis or financial sector crisis.

Why not? Mainly because of the huge amount of black money in Indian real estate. This has saved the Indian financial sector in unexpected ways. Traditionally, US mortgage lenders checked the creditworthiness of borrowers, and then made the borrower pay at least 20% of the house value, loaning the remaining 80%. So, even if the price of the house dipped, it would still be higher than the bank's loan, and the borrower had an incentive to repay it.

Also if I may add, buying a house in India involves a lot of sentimental factors associated with it. The strong family ties, concept of a joint family or living with your parents also serve as a deterrent to just switching houses or walking away from one. While the amount of black (illegal) money in circulation in India is certainly not advocated it’s an interesting outlook into how the home loan market in India works.