Factors Driving Demand and Default Risk in Residential Housing Loans: Indian Evidence

Bandyopadhyay, Arindam and Saha, Asish (2009): Factors Driving Demand and Default Risk in Residential Housing Loans: Indian Evidence.

Abstract

This paper empirically examines the functional role of various micro and macro economic as well as situational factors that determine residential housing demand and risk of borrower default. Using 13,487 housing loan account sanctioned from 1993-2007) data from Housing Finance Institutions (HFIs) in India, we investigate the crucial factors that drive demand for housing and its correlation with borrower characteristics. Next, we examine housing loan defaults and the major causative factors of the same. Our empirical results suggest that borrower defaults on housing loan payments is mainly driven by change in market value of the property vis-à-vis the loan amount and EMI to income ratio. A 10 percent decrease in the market value of the property vis-à-vis the loan amount raises the odds of default by 1.55 percent. Similarly, a 10 percent increase in EMI to income ratio raises the delinquency chance by 4.50 percent. However, one cannot ignore borrower characteristicslike marital status, employment situation, regional locations, city locations, age profile and house preference which otherwise may inhibit lender to properly assess credit risk in home loan business as our results show that these parameters also act as default triggers.

• Item Type: MPRA Paper
• Language: English
• Keywords: Housing Demand, Risk Management, Financial Institutions and Banks
• Subjects: G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook; R - Urban, Rural, Regional, Real Estate, and Transportation Economics > R2 - Household Analysis > R21 - Housing Demand; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

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