WOW! A $500 million currency note after a $100 million currency note has been printed in Zimbabwe which is facing hyperinflation. Zimbabwe’s highest inflation was last estimated in July at 231 million percent but is now believed to be much higher. And did we say we were at 8% and still dreading the effects! Scary, isnt it.
$100 million in Zimbabwe = $14 USD. Unbelievably true!! The highest inflation India has ever faced is 53.8% way back in the famine year of 1943. Many other Asian countries have done far worse than India over the years. (The less said about hyperinflation-prone Latin America, the better.) Inflation in China reached 1,579% in 1947, when there was a civil war raging there. Japanese inflation peaked at 568% in 1945, the year of defeat and economic collapse. South Korea saw inflation shoot up to 210% in 1951, when it was at war with the communist North.
All this thought about the hyperinflation led me to wonder what the property market in Zimbabwe would be like. As it appears, the rentals are revised very rapidly without any major developments. Surprisingly, there is huge demand from South African and Russian buyers for Zimbabwean property despite the global meltdown and the countrys problems.
Further research provided more information about the problems. The president Mugabe who has been at the helm since the country got independence in 1980 from the Britishers in 1980, has started a new land redistribution project that takes property from white farmers and turns it over to blacks. He has said that Britain should be responsible for compensating farmers, because British settlers took the land in the first place. Land redistribution has led to widespread food shortages and stratospheric inflation.
The situation is expected to get worse in the country with widespread cholera epidemic that has killed thousands of people. The country is facing a currency crisis and a political infighting is not going to help Zimbabwe resolve its issues. Either the United Nations or the United States need to intervene to bring this country out of a crisis.
Friday, December 12, 2008
Is the fixed 9.5% rate for home loans justified?
My previous post talks about the new government regulation where home loans below Rs20 laks will be available at lower than market rates at 9.5% (Read here). On second thoughts I was wondering whether it is fair on the PSU banks to provide loans at such a cheap rate. The gainers will be home builders who have till now made millions by charging exhorbitant rates for their properties. The losers will be banks whose profitability will be eroded or the government will bear the losses through subsidies. Hence, in this case private realtors will bag the profits and government will bear the losses! Should'nt the real estate builders be asked to reduce prices of their flats/ houses/ villas that they have been selling at exhorbitant prices.
Secondly, why is the government supporting only the real estate sector. There are equally hit rate sensitive sectors like automobiles, construction etc. Why arent these being protected with impending bankruptcies in US of the 3 auto majors - GM, Ford and Chrysler. Is it because real estate contributes over 10% to GDP with its forward and backward linkages with steel, auto, construction sectors etc. Then sectors like textile need equal attention as they generate employment. What about banking? A banking sector collapse can send ripples across the economy.
Lets see what measures are further taken by the government to prop up the economy or more specifically the stronger lobbying sectors!
Secondly, why is the government supporting only the real estate sector. There are equally hit rate sensitive sectors like automobiles, construction etc. Why arent these being protected with impending bankruptcies in US of the 3 auto majors - GM, Ford and Chrysler. Is it because real estate contributes over 10% to GDP with its forward and backward linkages with steel, auto, construction sectors etc. Then sectors like textile need equal attention as they generate employment. What about banking? A banking sector collapse can send ripples across the economy.
Lets see what measures are further taken by the government to prop up the economy or more specifically the stronger lobbying sectors!
Tuesday, December 9, 2008
Government plans to fix home loan rates for PSU Banks at 9.5% will be ineffective...Heres why?
Public sector banks are set to offer home loans of up to Rs20 - 25 lakh at a concessional rate of 9.5% for a period of five years as part of the government’s fiscal stimulus package to spur spending and bolster sagging economic growth. Read more
This would mean the cost of funds is greater than the return that these PSBs would be getting. As it is the profitability and efficiency of the Indian PSBs are dangling. Banks and housing finance firms are now charging between 12% and 14% for fixed-rate home loans and offering floating-rate mortgages at between 9.5% and 11.75%.
It seems the Indian bankers have not learnt the lessons of subprime crisis and option ARM pricing. Rates will stay at 9.5% until the loan resets to the market rate.This will greatly harm the bankers as it has done in the subprime crisis.
PSU Banks account for only 20% of the total housing market, hence limiting the scope of the stimulus package.
The obvious outcome of this policy will be that the homebuilders will price the houses at 20 - 25 laks in white and the remaining in black to increase sales. Moreover, they will build jodi flats, which will individually cost 25 laks and the affluent buyers can make use of this scheme to benefit.
One concern is what will happen once the interest rates fall below 9.5%, which seems to be happening in the next 2 years. Nothing has been mentioned and this makes the deal unattractive!
This would mean the cost of funds is greater than the return that these PSBs would be getting. As it is the profitability and efficiency of the Indian PSBs are dangling. Banks and housing finance firms are now charging between 12% and 14% for fixed-rate home loans and offering floating-rate mortgages at between 9.5% and 11.75%.
It seems the Indian bankers have not learnt the lessons of subprime crisis and option ARM pricing. Rates will stay at 9.5% until the loan resets to the market rate.This will greatly harm the bankers as it has done in the subprime crisis.
PSU Banks account for only 20% of the total housing market, hence limiting the scope of the stimulus package.
The obvious outcome of this policy will be that the homebuilders will price the houses at 20 - 25 laks in white and the remaining in black to increase sales. Moreover, they will build jodi flats, which will individually cost 25 laks and the affluent buyers can make use of this scheme to benefit.
One concern is what will happen once the interest rates fall below 9.5%, which seems to be happening in the next 2 years. Nothing has been mentioned and this makes the deal unattractive!
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