India has traditionally been characterised by large joint families staying in paternal houses in their native towns. Here urban migration, nuclearization of families and allied concepts began to find their foot only towards the end of the 20th century. While homeownership in new cities was a dream for majority of the migrants, it remained subdued owing to the affordability and lack of financing options.
On the finance front – the initial set of HFCs (HDFC, DHFL) had been set up in the late 1970s and early 1980s, and a formal institutional system was emerging with the formation of the National Housing Bank (NHB) in 1988. However, the sector was still in its infancy and the banks had limited interest in housing finance (in March 1990, housing credit was just 2.3% of the total bank credit).
2000 – 2011 | Real-estate boom and investors’ market
On the back of the reforms carried out in early the 1990s, the new millennium for India came with a promise of rapid growth and development. This trajectory was visible in the housing finance disbursements which grew at 41% CAGR from Rs. 19000 Cr in 2000-01 to Rs. 77000 Cr in 2004-05. The mortgage to GDP ratio that stood at 3.4% in 2001 grew to 7.8% by 2008.
This growth can be attributed to the below pointers:
1.Increased demand – The economic reforms of past decade and the growing services sector led to India becoming a major growing economy. This brought affluence to a select set of working professionals with higher disposable incomes, resulting in growing housing demand.
2. Infrastructure Development and Housing projects – Several cities saw massive expansion including the development of suburbs and emergence of a few satellite towns like Navi Mumbai and Gurgaon
The increasing demand for housing and the rising prices led to the entry to newer developers and launch of many housing projects. The demand scenario, credit availability and the presence of cheap labour that had moved away from agriculture aided the developers.
3. Piquing the interest of banks in the sector – Against the backdrop of lower interest regime, industrial slow-down, sluggish credit off-take and ample liquidity, the commercial banks started seeing real-estate as an engine for credit growth. The RBI directive of 1998 to set aside 3% of their incremental deposits for lending to housing sector provided an additional fillip to this. The banks’ disbursement grew 9x and the market share of banks grew from 29% in 2000-01 to 66% in 2004-05. The entry of the new age banks with competitive prices, friendly terms and the service mindset change the complexion of the home loans market.
The lending, however, continued to be to the affluent segments, leaving the masses out of this boom.
The above factors combined with rising home prices, low-interest rates and banks’/ HFCs’ preference of lending to the affluent made for an ideal playground for the investors. The one-year all-India return in December 2011 stood at 26.3 percent. In fact, returns in some cities were even higher like Delhi and Bengaluru which stood at 48.4% and 41.6% respectively.
2011 – 2015 | Cracks emerge
The house prices continued to rise in the 1st half of this decade, but the rate of price rise and the buoyancy about the sector was on a decline. The reason for the imminent stagnancy in the sector can be attributed to the waning investor confidence (this was due to slowing GDP growth, policy uncertainty, rising interest rate, lower rental yields, etc).
The end-user market for affordable properties which saw a lower reduction in demand was relatively small and faced supply-side constraints (housing units as well as housing finance).
India was about to enter a phase of massive demand-supply mismatch. A large number of housing units in the luxury segment had limited takers, resulting in an unsustainable inventory overhang. The increasing demand for affordable housing was curtailed by the unavailability of homes.
There was a surplus of 11 million homes and a shortage of 18 million at the same time during the period.
2015 – 2020 | Muted market; momentous developments
While the house prices have been stagnant during 2015-2020 and the overall market muted, this period saw a few developments that went on to be pivotal for the transformation of the housing market. The key developments are as follows –
1.Government’s ‘Housing for All’ initiative – This ambitious initiative that aims to provide 2 Cr affordable homes by 2022 has brought affordable housing to the foreground. This is acting as a catalyst to bring back the lacking buoyancy in the sector.
2. RERA Implementation – The Real Estate Regulation Act fulfilled the long-standing demand from the real estate industry for a central regulator. This was a significant sentiment booster protecting the interests of the end-users and holding developers accountable, especially for fair play in transactions and timely execution of projects.
3. Banks and HFCs’ foray in low/ medium ticket housing segment – The sector saw the total number of HFCs doubling in 5 years from ~50 in 2014. Most of the new players entered in low to medium ticket housing space and came either with deep-regional expertise or superior-tech ability. While the overall housing finance market has grown by 15-20% annually in these 5 years, these new players have grown at ~30%. The large players have also entered the segment with specialised affordable vertical and are looking at it to fuel their next level of growth.
4. Formalization of economy and improved credit assessment – The implementation of GST and the phenomenal rise of digital payments has brought a significant part of the economy under the formal ambit. The highest ever GST collection in April’21 despite the partial lockdown induced lower sales hints at the formalization of the economy. This formalization will enable newer sources of alternate data leading to better ways of credit assessment.
5. Consolidation of Developers – As per reports of Motilal Oswal and Propequity, 40%-60% of the developers in Mumbai and Delhi have closed shop or merged with large developers in the last decade. As per Propequity, 15% of new launches are done by top 25 developers of that city as against 7-8% a decade back. This can partially be attributed to RERA implementation and is expected to boost customer confidence owing to better execution of projects.
2020-21 | Covid-19 and Resurgent Housing market
Covid-19 and the lockdown brought the entire country to a halt in March 2020; and the restrictions continued for a better part of 2020. This had a huge impact on the overall economy. The recovery in 2nd half of FY21 was however better than what was expected; and the housing sector was one of the shining stars of the recovery story. The last quarter of FY’21 saw home loan disbursements that were 50% higher than usual. The surge in housing demands and home loans was primarily due to –
1.Increased savings in households with stable income – Household spending dipped at a 2.4% year-on-year in Q4, following the 11.3% contraction in Q3; Household financial savings as a percentage of GDP was 21% in Q1 2021- 2021.
2. Perceived need for an owned place or need for a larger home owing to work/study from home model
3. Low-Interest rates and property prices
4. Tax incentives
5. Better transaction terms for buyers through lower circle rates, lower GST rate and waiver of stamp duty
6. Government Initiatives on enhancing liquidity
One phenomenon that saw a significant acceleration in FY21 was the adoption of technology, and this is expected to hold the housing sector in good stead in the long run.
Medium to long term story | Up, Up and Above
The emergence of 2nd wave of Covid has renewed the inhibitions on sustainability of the growth trajectory that the housing sector experienced in FY21. These inhibitions may come out to be true and the next 12-18 months may see a lower growth owing to the health-care expenses made in the last couple of months and the reduction in number of employees in formal sector.
However, this period would just be a bump in the road if we are to look at the medium to long term scenario. The medium to long term story looks strong owing to –
1.Strong Demographics – The growing demand projections are based on strong fundamentals of the Indian population. The Indian GDP per capita is on the rise and will lead to higher disposable income. The average age is 27 years while the average first-time home-buyers’ age ranges from 35-40 years as per different estimates. A large population with a higher disposable income will continue to enter the home-buying age bracket for the next 20-25 years.
2. Increased Urbanisation & Nuclearization of families – The migration of people in pursuit of better education and career opportunities to Indian cities from rural and semi-urban areas has almost doubled in the last 10 years. This coupled with nuclearization of families will continue to propel the need for housing in India.
3. Correction in Demand–supply mismatch – India continues to have a large demand-supply mismatch and a shortage of homes. The scenario, however, has seen an improvement in the top 14 cities. The inventory overhang (time needed for developers to sell-off the available inventory), as per Propequity is at 25 months (20-24 months is considered healthy) and the housing sales for last 5 years at ~3 lakh units is in line with the new launches. The unsold inventory has also seen a reduction – new launches have dropped from 4+ lakhs in 2010 to ~2 lakhs (~50%) while the sales have dropped from 3.2 lakh units to 2.7 lakh units (~16%).
The shortage in affordable housing continues to exist but is being catered to through the increased focus of developers on low-income/ middle-income housing and the PMAY scheme.
4. Cost of Capital for Lenders – The Indian financial ecosystem is maturing fast, and this is leading to the emergence of newer models and alternate sources of funding – new securitization guidelines, co-lending, formation of real-estate investment funds, etc. These new phenomena will allow an increased synergy between the banks’ availability of liquidity and new-age HFCs’ superior reach through technical and deep regional expertise, resulting in better interest rates for end-users in the low/ medium ticket housing markets.
5. Strong Regulatory impetus – PMAY, RERA, GST rate cut on affordable housing, personal tax incentives on home loan and better transaction terms to homebuyers through various measures are acting as the drawing board for the long-term housing ecosystem. In a poll conducted by IMGC, 66% of the participants have voted PMAY as the most effective scheme to promote housing.
The per-capita home ownership in the country is far behind that of developed economies. This coupled with robust supply, fair play in transactions, government incentives, and lowering of average homebuyer age in the country presents a room full of opportunities for the sector.
Various reports project the real-estate market to reach $1 trillion by 2030; and the positive long-term impact of the strong demographics and the momentous regulatory developments of last 5-7 years will be felt as the sector embarks on this growth trajectory.
Author: Mr. Devashish Belsare, Chief Manager, Virtual RM Channel, IMGC.
