Housing finance in India

• The growth and scope
• Stability of housing loan market

Housing is a crucial sector for the global economic growth due to its multiplier effect for driving the demand, especially for several ancillary sectors. The growth of the sector is dependent on numerous factors, the key being housing finance. This play a significant role as it helps bridge the gap between the financial constraints and aspiration of buyers. Additionally, housing finance strongly influences house prices. It is the direct or indirect lending of funds, which enable borrowers to purchase, rebuild or expand their houses.

In India, there are several types of housing finance instruments. These primarily differ in purpose for use of funds, but overall serve the purpose to help borrowers purchase or remodel their abodes.

Housing finance In India, growth and scope

According to the 2011 census data approximately 67% of the occupied houses were in rural India. Moreover, roughly 87% families lived in owned units indicating a strong bias towards home ownership. Furthermore, around 73% households lived in dwellings with less than two rooms and an average household consisted five members, this points towards a constrained living space. India is the second most populous nation in the world and has a large young population, this implies a high demographic dividend. The migration from rural to urban areas has been picking up in recent years. This creates an ideal atmosphere for a supernormal growth of housing and a large proportion of the demand will be facilitated through housing finance.

The housing finance industry in India saw a strong growth rate and the total loan book for all housing loans grew at a CAGR of 16.72% (2012-17). This growth was nearly double of the overall credit growth for the country and portrays a robust outlook for housing finance sector.  The entire loan performance growth was led by a rapidly expanding economy, falling interest rates and low housing area per capita in relation to the developed economies. Hence, brisk economic development led to a creation of large middle class and people migrated to big cities. This drove the growth of housing finance and high per capita income increased the borrowing capacity of people. 

In India, the housing finance market is dominated by the leading public and private sector banks and non-banking housing finance companies such as HDFC Ltd., LIC Housing Finance, Can Fin Homes, PNB Housing Finance and Dewan Housing Finance. The market has reached a stage of the intense competition where each player is competing for the market share.

Stability of the housing loan market

Further, in the wake of a favourable backdrop of the Indian economy, several initiatives were launched by banks and housing finance companies to expand their loan book. The fall in interest rates (2013) from the high encouraged the demand for home loans and resulted in a larger growth. This was positively supported by healthy internals in the industry with very strong performance seen on the net and gross non-performing assets. The gross non-performing asset (GNPA) as a percent of total advance data from the top 5 housing finance companies indicate a stable to declining trend. In addition, against the same, the banking sector as a whole has been experiencing a significant rise in the GNPA to total advances from FY 2013 to 2017 period. The overall total GNPA for the banks in India increased by more than four times. This suggests that the housing loan market is more stable and housing finance companies are lending to borrowers with a good repayment capacity. The loans are backed by houses, these can be easily auctioned in an event of a default. This enabled companies to recover their funds with a good turnaround time. The financial institutions usually require a sizeable down payment, which is dependent on the credit rating of the borrower and help in the maintenance of a low and stable GNPA level. 

The Indian government’s initiative to support the affordable housing segment is another step in the right direction for the industry and should further drive the growth as a whole. However, a bit of caution needs to be exercised particularly for sub INR 200,000 loans. The government’s push of ‘Housing for All’ is targeting low-income groups though the ability of these borrowers to service the debt is yet to be examined. A substantial rise in home loans for this initiative could end up increasing the NPAs of housing finance companies. Thus, banks need to be prudent and ensure that lending is conservative and loans should be disbursed to individuals with a good credit rating to minimize NPAs.

The overall growth of housing prices in India is another positive attached to the growth of the industry. While a very high increase in prices lead to speculative buying and creates headwinds for the industry in the long-run, the growth in India has primarily been respectable. Few of the overheated markets also witnessed time-wise correction in the past 1 to 2 year and provides additional stability for the housing market participants including banks, construction and real estate companies as well as buyers. In the four-year period from June 2013 to June 2017, the correlation between housing prices and housing finance market size stood at 0.98. 

The growth in housing finance potentially results in a rise of housing prices and vice versa though this can also lead to speculative buying and lending. However, the Indian housing market is showing signs of strong fundamentals despite a solid growth in lending and appreciation of prices. The nation is still away from facing a speculative frenzy caused by excessive mortgage lending like the US and the European markets (2008-12).

Therefore, the big picture is that a rising housing demand, initiatives of the government to drive affordable housing, stable to falling interest rates, the demographic dividend, migration from rural to urban areas and the growth in personal disposable income indicates that the Indian housing finance market can continue its current robust growth rate, enabling it to get more entrenched in the Indian economy in long run.