Catch them young

It's never too late to teach your child financial matters. Start now...

Financial prudence is something that needs to be inculcated early. Especially, in this era where plastic has taken over from real cash, children need to be taught that ATM does not mean All-Time Money. Instead, one can only withdraw the amount which one has in their account through the ATM (Any-Time Money) card.

So how should one go about doing that? For starters, start talking about money as soon as the child is old enough.

Says Gaurav Mashruwala, financial planner, “I got my four-year daughter to plant a tree and water it everyday so that she understands the concept of growth.”

Slowly he intends to give her a glass jar where coins would be put in and when something is bought from those savings then, the number of coins would go down. In other words, the rise and fall in the jar would be indicative of growing and falling wealth.

Says Sajag Sanghavi, financial planner, “One should start encouraging the child to save from the age of 6-7 years.” Ideally, you should open an account for the child as soon as he/she is born.

In India, traditionally family members come to see the new born with small amounts. This amount could be used to open this account. Also, you can make investment in your child’s name from this account.

Sanghavi feels that the children should use this account to deposit their savings as well. For instance, if the pocket money given for a week is Rs 1,000 and the child saves Rs 100 from it, get him/her to save it in their account. In fact, you could even add some amount from your side. This would explain the concept of interest to them.

“Also, keeping them informed about their financial needs for education is important,” adds Sanghavi. That is, they need to know that they would require large sums of money for education after graduation. To achieve this, put some amount of money in their accounts and keep on passing cheques to mutual funds through this account.

Another way to make them realise the importance of money is, to teach them to budget themselves. For this, you need to include them in your budgeting sessions.

Mashruwala also recommends writing down the budget and once pocket money is being given, tell them that Task A, B, C and so on will need to be covered under their budget. Finally, the most important lesson that they can learn is, from parents themselves. With a limited expenditure habit for yourself, you can set an example for them to follow.

Housing finance: Boom or bust?

The rapid growth of the mortgage industry in India in the recent years has raised concerns about its sustainability and implications on the country's financial and macroeconomic stability. The IMF, in its World Economic Outlook, 2003 indicated that output losses after real estate crashes in developed countries have, on an average, been twice as large as those after stock market crashes, usually resulting in lasting recessions.

The fact that the surge in demand for mortgage credit has been trailed by an equally strong upturn in prices has led to apprehensions as to whether the boom is sustainable or is merely a financial bubble ready to burst. Further, the surge in housing prices globally has gone hand-in-hand with a much larger jump in household debt than in previous booms.

The magnitude of mortgage credit...
The pace of housing sector growth can be gauged from the fact that the total value of residential property in developed economies increased by an estimated US$ 20 trillion to over US$ 60 trillion in the last three years - which is higher than the increase in market capitalisation of global capital markets (Source: IMF). Housing market in India, as evidenced by the growth in bank exposures to the sector, took off mainly since FY01. Credit to the retail mortgage sector grew at a CAGR of 48% between FY01 to FY06 and comprised 12.3% of non-food credit against 3.5% in FY01. Also, as per the RBI's annual statement for FY07, the incremental growth in loans to commercial real estate and housing sectors clocked rates of 84% YoY and 29% YoY respectively in FY06.

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Reasons for the surge...
The rapid growth in housing loan \nmarket has been jointly supported by the growth in middle class population, \nfavourable demographic structure, relatively lower real estate prices, and more \nimportantly, rise in disposable incomes. Furthermore, attractive fiscal \nincentives for housing loans make them ideal vehicles for tax planning for the \nsalaried class. For banks and housing finance institutions, the regulatory \nframework facilitated the higher exposure by prescribing risk weights for \nhousing loans and giving it the benefit of compliance with the targets mandated \nfor priority sector lending. Besides, the loans were backed by the relative \nsafety of such assets given the tangible nature of the primary security and the \ncomfort obtained from the SARFAESI Act, 2002.

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Versus the US...
In the United States, which is at present \nexperiencing a strong cycle in the housing market, prices in certain regions \nhave risen sharply if measured against the yardstick of affordability - \ncalculated as the ratio of housing prices to annual income, reflecting a build \nup of the asset bubble. In fact, at present, the median price of new house in \nthe US is more than 5 times the median household income.

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Contrasting this, the scenario is India is still comfortable. At present, \nthe median price of new house in India is 4 times the median household income as \nagainst 22 times in 1995. Also, thanks to fiscal incentives, the effective rate \nof home loan has come down to 4.5% in 2006 against 11.7% in 2000. \n

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It\'s here to stay!
The mortgage to GDP ratio of 6% in India as \nagainst 54% in the US underscores the latent demand for the same. More so, with \nIndia being the second fastest growing economy in the world. Another interesting \npoint to note is that while the home loan demand in the developed economies is \nlargely for investment purposes (thus having a speculative component), 70% of \nthe demand in India is for habitation purpose (thus making it less risky). Thus, \nthe housing sector given its core importance in the developmental goals of the \neconomy and in sustaining financial stability - is set to remain on the \nregulator\'s radar. However, investors need to judge their stance on the sector \nbased on the fact that even if the current robust rate of growth may not be \nsustainable, the buoyancy in the sector may linger in the medium \nterm.

Reasons for the surge...
The rapid growth in housing loan market has been jointly supported by the growth in middle class population, favourable demographic structure, relatively lower real estate prices, and more importantly, rise in disposable incomes. Furthermore, attractive fiscal incentives for housing loans make them ideal vehicles for tax planning for the salaried class. For banks and housing finance institutions, the regulatory framework facilitated the higher exposure by prescribing risk weights for housing loans and giving it the benefit of compliance with the targets mandated for priority sector lending. Besides, the loans were backed by the relative safety of such assets given the tangible nature of the primary security and the comfort obtained from the SARFAESI Act, 2002.

Versus the US...
In the United States, which is at present experiencing a strong cycle in the housing market, prices in certain regions have risen sharply if measured against the yardstick of affordability - calculated as the ratio of housing prices to annual income, reflecting a build up of the asset bubble. In fact, at present, the median price of new house in the US is more than 5 times the median household income.

Contrasting this, the scenario is India is still comfortable. At present, the median price of new house in India is 4 times the median household income as against 22 times in 1995. Also, thanks to fiscal incentives, the effective rate of home loan has come down to 4.5% in 2006 against 11.7% in 2000.

It's here to stay!
The mortgage to GDP ratio of 6% in India as against 54% in the US underscores the latent demand for the same. More so, with India being the second fastest growing economy in the world. Another interesting point to note is that while the home loan demand in the developed economies is largely for investment purposes (thus having a speculative component), 70% of the demand in India is for habitation purpose (thus making it less risky). Thus, the housing sector given its core importance in the developmental goals of the economy and in sustaining financial stability - is set to remain on the regulator's radar. However, investors need to judge their stance on the sector based on the fact that even if the current robust rate of growth may not be sustainable, the buoyancy in the sector may linger in the medium term.