India Property's Migraine Pill

(Bloomberg Gadfly) -- India's war against cash has been giving a splitting headache to the country's real estate market, a popular conduit for tax evasion.

But before demonetization could crash home prices, New Delhi has come up with a migraine pill for builders.

Private-sector workers and their employers currently contribute to a state-mandated employee provident fund every month. Only three years' worth of wages can be withdrawn to invest in housing, and just once. Now, those limits are being scrapped.

This will bring India's pension fund very close in spirit to Singapore's Central Provident Fund, which since the 1980s has played a crucial role in the city-state's housing market.

Of the 20 percent minimum initial equity required for a Singapore mortgage, as much as 15 percent can come from CPF savings, which can also be used to pay monthly installments to banks. Research has shown that a 1 percent increase in the CPF contributes 1.6 percentage points to house price inflation. By comparison, a 1 percent rise in the island's foreigner population adds only 0.56 percentage point.

Anything that supports home prices over the longer term will be sweet music to Indian developers. Shares of DLF Ltd. and Prestige Estates Projects Ltd. were among the worst hit after Prime Minister Narendra Modi outlawed 86 percent of the country's currency stock on Nov. 8 and threatened to crack down on illicit wealth owners who hold properties in other people's names. The BSE Realty Index has only recently recovered from its 20 percent tumble.

Currently, India's employees' provident fund covers only 40 million people. Expect this number to swell as more of the one-billion-plus population leaves agriculture and small business to work at larger firms. Channeling a bigger chunk of a growing retirement-savings pool into property could expose home prices to bubbles, which would tend to burst during periods of mass unemployment.

It's a manageable risk, though. Keeping provident fund nest eggs -- including the amounts used in housing -- out of personal bankruptcies would protect retirement savings during a housing market bust.

Reeling under a wave of soured corporate debt that's tainted almost a sixth of their total loan book, India's state-run banks should also embrace the opportunity to have more retail assets on their balance sheets. They should be relieved, too, if a revival in housing demand boosts builders' ability to service their debts.

It's early days, but developers' migraine pill could end up being a hangover cure for India's undercapitalized banking system.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

To contact the author of this story: Andy Mukherjee in Singapore at amukherjee@bloomberg.net.

To contact the editor responsible for this story: Katrina Nicholas at knicholas2@bloomberg.net.