The rapid pace of urbanisation and affordable mortgages has spurred growth of the Indian housing finance market that is expected to grow at a compound annual growth rate (CAGR) of 20.58 per cent during the period 2022- 27. In the year 2021, it was witnessed that millennials and young borrowers are in need of urban accommodation and are a potential consumer base for home loans. They are almost accountable for 27 per cent of the borrowers.
Demand for housing is somehow directly proportional to income and the affordability of homes. Changing lifestyles and labor mobility towards metro cities have increased the demand for housing loans. The major factor that is contributing to the gained traction in the industry is increased urbanisation or quasi-urbanisation. The populace in rural areas is either migrating to urban areas or transforming their urban settlement into urban without much relocation. The question is, why so? The answer lies in the present scenario of agriculture. India’s agriculture contribution to the GDP in the year 2020-21 was approXimately 20 per cent, despite having a huge geographical land area of 328 million hectares (approx.) allocated to agriculture. The regular farmer is looking up to urban labour despite planning their next season of crops. This ultimately contributes to increased urbanisation and an escalated demand for housing in urban areas.
From the tangent of topography
We are a part of a nation that holds only 2.4 per cent of the world’s land while our population is 18 per cent of the world’s population. We can witness the hardship of allotting land for housing by merely looking at the ratio of land and people. But we are also a country that contributes a huge amount to its GDP by the real estate sector. In fact, the government’s budget for FY 22 has allotted quite a significant amount towards housing finance as the sector is expected to boost the GDP as well as the economy of the nation. Living in a country where every individual must have dreamt of their own home once in their life, the sector of housing finance itself becomes a paramount one for the economy.
Traditionally, banks have been the major players in the housing finance sector. Though the major drawback that has been seen in recent years is that only a major chunk of the elite class receives these loans, be it for any use and the class that needs it the most, remains abandoned from the privilege of getting any loans. If we look at the thumb rule, banking institutions sanction loans of up to 80 per cent of the property price. Therefore, the average salary to buy a house is at least 20-30 per cent of the lowest available flat price, i.e. Rs. 2.5 lakhs in the case of Delhi. Do every individual in Delhi earn this much? Will they ever be able to afford a house, if they don’t fall into the above-mentioned bracket?
A bird’s eye view of Indian housing finance
The country’s budget for 2022 includes several measures aimed at addressing the housing crisis, including increased funding for home loans. The government has announced a number of measures to support housing finance, including a new scheme for easy access to credit, additional funding for housing projects, and interest rate subsidies for housing loans. These measures are expected to improve demand for housing finance and help revive the sector.
Also, NBFCs play an important role in housing finance in India, providing financing to both individual borrowers and developers. They have been able to grow their market share in recent years, thanks to their flexible lending products and competitive interest rates. Microfinance institutions (MFIs) are also active in housing finance, helping to provide financing to low-income households.
All the banking segments have contributed to the economy of India. Though the contribution of the housing finance industry is predicted to be immense to the Indian economy. According to reports, 13 per cent of India’s GDP will be generated by the housing industry by 2025. Also, it is predicted that the real estate sector will be Rs 65,000 crores by 2040. The top seven Indian cities purchased more than 1700 acres of land in the previous year. Additionally, between 2017 and 2021, foreign investors spent US$10.3 billion on commercial real estate.
The government of India has taken several measures to promote and enhance the industry. The real estate sector can also make use of smart city projects, that is making 100 smart cities as assigned by the Ministry of Housing and Urban Affairs. These include an interest subsidy scheme for middle-income home buyers and an infrastructure status for affordable housing projects. Also, the Pradhan Mantri Awas Yojana (PMAY) received Rs 48,000 billion from the Union Budget 2022–2023 announced by the finance minister (PMAY) which is escalating quicker urban housing approvals.
Despite the pandemic’s undodgeable challenges on the industry, it finds the way to flourish along with government support for the major development in the housing sector.
Industry Perspective
“According to industry experts, urban areas have a shortage of 10 million units, and it is estimated that 25 million units of affordable housing will be required by 2030 to meet the growth in the country’s urban population. This will lead to an exponential increase in the housing loan demand”, says Anil Kaul, Managing Director, TATA Capital Housing Finance Ltd.
He further added that “There is also a demand acceleration in commercial real estate which is largely driven by positive economic growth with higher demand from the services and IT sector. Around 2.5 lakh crore square feet was absorbed across the top 8 markets in H1 of CY2022, which witnessed a growth of 107 per cent as compared to the same period last year.”
While expressing the views on the importance of housing finance companies, Gauri Shankar Agarwal, Chief Financial Officer, Shriram Housing Finance Ltd, said, “Housing Finance Companies (HFCs) can leverage their strong origination and collection expertise owing to their presence in local markets, commercial banks have the availability of cheaper funds for disbursal. This becomes even more relevant in the current scenario, where all lending institutions are battling elevated finance costs.”
He further added that HFCs have mastered the art of assessing the creditworthiness of certain niche customer segments, mostly those having informal income and the unbanked segments of society, which the banks have been staying away from, primarily due to the differences in their core target segment and credit risk management approach.
Mitigating the challenges and efficient road mapping
Post-pandemic, economies across the globe are fighting to come back and offset the negative impacts of the pandemic. However, it remains to be seen that the measures taken will be enough to revive the struggling housing market.
One of the biggest challenges facing the housing market is the increase in unemployment. Companies are on a major spree to lay off employees; big giants like Amazon even announced to lay off almost 10,000 employees. The increased unemployment will definitely impact the housing sector. Affected people are unable to repay their mortgages and people are hardly thinking of investing their money in industries like housing. Although the RBI has taken several measures to support the housing market, it remains to be seen whether these measures will be enough to offset the negative impacts of the pandemic.
The housing market is facing a decrease in demand for homes. The affected economy and job market has led to a decrease in demand for homes as people are deferring their plans to buy or invest in property. This is likely to have a negative impact on prices and may lead to an increase in defaults and foreclosures.
The government has also set up a task force to review the challenges facing the sector and devise a roadmap for revival. The World Bank announced to cut its 2022-23 (FY23) real gross domestic product (GDP) growth forecast for India to 6.5 per cent, from an earlier estimate of 7.5. Also, there has been an alarming warning that spillovers from Russia’s invasion of Ukraine and global monetary tightening will weigh on the economic outlook.
After all the havoc that is ongoing in the Indian and world economy, it is tough to unlock the doors of increased rates of housing finance, but the industry is hoping for its major comeback. It will align itself with the coming investments to blur the cloudy sky and look for the rising sun in the industry.
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