Housing finance sector in for a wild ride

for the worse. Housing finance companies lend a percentage, say 70-80 per cent, of the estimated (white) price of a given property. (Some housing finance players also "informally" arrange personal loans for the black component at much higher interest rates). If real estate prices drop, LTV might hit red-flag territory if for example, the loan exceeds the value of the property.

Again, many mortgages are secured against the value of some real estate unit owned by the person applying for the loan. These "second home loans" would need to be reviewed if the value of the "first home" drops below a critical level.

The pain could well continue for say, another two quarters. The market is operating on guesswork when it revalues housing finance companies since the dimensions of the impact is unknown. Even the best analysts will almost certainly misjudge by significant margins. Consensus valuations of the housing finance market could err on either the optimistic or pessimistic side, and there will be big price swings as estimates are re-adjusted through the next six months or so.

Whenever liquidity does return to the system however, housing finance companies will see several longterm factors working in their favour. One is that real estate prices will be down and there will be a large stock of unsold inventory. Realtors will be closer to desperation and more prepared to drop prices. This is good for housing finance in terms of the supply side.

At the same time, middle class persons will be more interested in buying if both real estate prices and EMIs are dropping to more realistic levels. This will be good for housing finance on the demand side. And, as mentioned above, costs will fall for housing finances since they will be able to source cash cheaper.

It could be a wild ride for the industry. The mid-term prognosis is surely bad. That is now being priced into equity valuations. But, at some stage, these companies will see an equally sharp recovery in their business prospects and in their equity valuations.