The onset of the pandemic had a devastating effect on the economy last year. The national lockdown, uncertainty over vaccine development and dealing with a completely unknown event which had no precedent in the modern era led to an understandable pessimism about what the future holds for us. From an economic perspective, I was confident we would begin to recover as lockdown measures are eased. India’s macroeconomic fundamentals are sound and our inherent demand cannot be questioned.
As regards housing loans, there was a general consensus that the recovery would be gradual, but it was much faster than anticipated. At HDFC, our year-to-date retail disbursements not only continued to improve month-on -month, but more importantly, from September onwards, there was consistent growth compared to the same month in the previous year. In fact, in the March quarter, we saw 60 per cent growth in individual disbursements. I cannot remember a full quarter of such sharp growth in HDFC’s history.
Whilst recurring waves may cause a momentary pause in offtake of housing loans, the effect will always be significantly less severe than during the first wave. Importantly, the recent lockdowns have been localised, with micro containment zones, and not as strict as last year, with many sectors allowed to operate. If last September to March is any indication, then one can be reasonably confident that the demand for housing is more buoyant than ever. With the vaccination drive gathering pace, I can only see an upward momentum for the housing sector.
Within the housing and real estate sector, it is affordable housing which has been the driving force. The salaried and the middle-class are capitalising on the opportunities which are being offered. Indeed, it is a ‘Goldilocks Zone’ for the customer as the confluence of low interest rates (I really don’t think interest rates in India are likely get lower than this), soft or stable property prices and continued fiscal benefits and subsidies makes this the ideal period for homebuyers. The pandemic has made people recognise the need for additional space at home. They are shifting to larger homes.
Further, certain states have provided time-bound relief. For example, Maharashtra had lowered the stamp duty from 5 per cent to 2 per cent for properties registered before December 31, 2020, and to 3 per cent from January 1, 2021 to March 31, 2021. Mumbai recorded historic number of house sale deed registrations. At a broader level, I would like to elucidate some of the factors that will ensure long-term growth of affordable housing:
1. Inherent Demand
First and foremost, India has a huge housing shortage. There is a tremendous potential for growth as the penetration level of mortgages in India is extremely low compared to other countries. The mortgage to GDP ratio in India is only 11 per cent compared to peer countries’ 20-30 per cent or advanced countries’ 60 per cent.
Housing is a basic necessity and not a luxury. Most middle-income people who take loans to buy a house are genuine end-users and intend to stay in the house that they purchase.
Data over the years has clearly shown that housing loans have much lower defaults and, consequently, a better credit risk profile compared to other personal loans. Also, demand for housing has proved to be relatively inelastic even in a higher interest rate environment or during a temporary slowdown in the economy.
2. Favourable Demographics
Two thirds of India’s population is below 35 years of age and unlike the west, in India, people do not buy a home when they are in their 20s. The average age of a first-time home buyer in India is about 39 years. And with two-thirds of the population below 35, what this means is that two-thirds of the population has not even contemplated buying a house yet.
However, over the next 5, 10, 15 years, all these younger people will get to an age where they will buy a house. Therefore, in my view, there will be a structural long-term demand for housing and, therefore, housing finance in India.
3. Improved Affordability
Government support and rising incomes have contributed to improved affordability. As per our estimates, this is arguably the best period in terms of housing affordability in over two and a half decades.
Around 25 years ago, it would have taken 22 times a person’s annual income to afford a modest sized house in most cities in India. Today, this has improved to just 3.2 times the annual income.
4. Government Initiatives
Due to incentives and ongoing reforms, the housing and real estate sector has become structurally stronger over the years. For instance, the affordable housing segment has become a sweet spot for every constituent across the housing chain due to its incentivisation by the government.
Within the ecosystem of the “Housing for All” programme of the government is the Credit Linked Subsidy Scheme (CLSS), which has been a major success. As on March 31, 2021, it had benefited an estimated 11.3 million first-time homebuyers. In this scheme, the interest subsidy on the home loan is paid to the beneficiary upfront, thereby reducing the amount of the loan and, consequently, the EMI. The upfront subsidy under the CLSS goes a long way in enabling individuals to become homeowners much earlier in life.
Affordable housing has also been supported by tax incentives wherein a developer gets 100 per cent deduction on profits on their affordable housing projects. To the credit of the government, the timeline for availing this benefit has been regularly extended.
I now have a few suggestions that may be considered for the sustainable growth of affordable housing:
1. Leveraging Technology
Technology has enabled developers to virtually showcase their properties. Home loan providers, too, have leveraged their digital platforms to serve new and existing customers.
Further capitalising on technology will immensely help the real estate sector. For instance, progress of projects can be monitored through digital dashboards, with data driving key decisions. Funding for projects based on construction milestones can also be better monitored online. This will bring in the much-needed transparency and accountability and improve cost efficiencies.
With Indian consumers increasingly relying on technology for their financial transactions, regulators may consider permitting digital signatures for property-related documents. It would immensely help homebuyers complete a digital end-to-end purchase.
2. Raising Resources
Many NBFCs which were earlier used to provide funds to real estate developers have withdrawn from the market partly as a result of the stress they faced and partly due to the current regulations. Whilst top quality developers continue to raise funds, the next grade of developers is unable to borrow money from the formal system. These developers are, therefore, being forced to resort to raising funds from real estate funds/private equity investors whose return expectations are extremely high. This additional cost ultimately gets passed onto the customer, thus making housing more expensive.
3. Infrastructural Development
A major problem with affordable housing is that if it is built in far-flung city outskirts where land is cheaper, there are often no takers, as the necessary social infrastructure in terms of schools and hospitals may not be available. In some instances, developers could be offering attractive property prices on city outskirts, yet people would be reluctant to shift because it would affect their quality of life. Hence, key stakeholders have to ensure that civic amenities and housing development happen simultaneously.
The authorities could also review processes for master planning and provide for upward increases in FSI commensurate with investment in infrastructure.
4. Mortgage Guarantee Product
The mortgage guarantee product will become an essential component. It is a product whose time has come and I am sure in the days to come the India Mortgage Guarantee Corporation will deepen its footprint.
The demand for affordable housing in India is deep and resilient. With more developers transitioning to the mid- and affordable segment by providing right sized, right priced units, I believe that the affordable residential real estate segment will continue to see strong traction. The demand for housing is not pent-up demand. It is structural demand that is here to stay.
(The author is Vice Chairman & CEO at HDFC Ltd)
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