Housing finance key to $5-tn economy
Housing plays a pivotal role for the long-term sustainable growth of any economy. For many of us, having our own home fulfils a long-sought aspiration.
In the US, home ownership is a critical component of the American dream. It is a symbol of upward mobility and optimism. It carries the notion that tomorrow would be a better day than today. That is why the effects of the subprime crisis in 2008 were so devastating - too many dreams were crushed. Thankfully, the US was able to recover from the crisis and get their economy back on track.
People will go ahead and take a housing loan only when they are optimistic about their future prospects. That is why as housing finance professionals we are not worried about interest rate changes but pay close attention to employment creation and job stability.
As an economy improves, the mortgage to GDP improves till it reaches a sustainable level. When we say that the mortgage to GDP ratio in India is only 10 per cent compared to 66 per cent in the UK, 53 per cent in the US and 26 per cent in China, it signifies that the Indian housing market is still under penetrated with a tremendous potential to grow. If India is to be a $5 trillion economy in the next few years, then housing finance will be an important contributor to achieve that landmark.
Demographics in India are extremely favourable. The average age of a middle class Indian when he or she first buys a house and takes a loan is 38 years; and with 2/3rd of our population being below 35 years of age, all these people will over a period of time need housing and, therefore, housing loans. Hence, there is a huge potential for home loans.
I am optimistic and do believe that the economy has bottomed out.
For the housing sector, the authorities are aware of the strong linkages it has with the economy. The sector has significant backward and forward linkages with nearly 300 industries, which contributes to capital formation, employment and income opportunities. An increase in employment leads to more wages which in turn leads to increased consumption. Housing demand creates more jobs both in the construction industry as well as in affiliated industries. This in turn spurs consumption and incentivises manufacturers to produce more and satisfy the demand and consequently create more jobs. Thus, housing catalyses and provides a fillip to economic growth.
Despite the progress the housing industry has made over the years, there is a need to bring in further reforms to achieve the sector’s true potential. I am happy to see some projects have been cleared for the ~25,000crore special fund that has been set up to revive stuck projects. Currently, housing projects which are 60 to 80 per cent complete are unable to receive last-mile funding. Regulators may want to consider changing the regulations such that any secured fresh funding should be ring-fenced. Lenders are reluctant to lend to stressed projects due to the fact that any fresh funding will be classified as a non-perfoming assets on Day One in the books of the new lender. Such stuck projects can become unviable as interest costs rise.
Historically, some part of the funding for a project used to come from sale proceeds of under-construction properties. In recent years, for a variety of reasons, the demand for underconstruction properties has come down resulting in developers unable to get last mile funding. The Reserve Bank of India (RBI) has permitted a one-time restructuring of real estate loans provided that the project for which the loan was taken is delayed for reasons beyond the control of the developer.
My suggestion would be that this provision should also be applicable to instances where slow project sales have resulted in a shortfall of cash flows and thus severely hampered the developer’s ability to repay the loan on time.
In such instances too, a onetime restructuring should be permitted subject to the condition that the project is cash flow positive. A similar exceptional regulatory treatment was permitted by the RBI in 2009, which helped revive the real estate industry.
Another issue I would like to mention is about how land funding can be made available at a reasonable rate. Since 2006, the RBI has prohibited banks and housing finance companies from funding land transactions. Funding for land is therefore done largely by private equity funds, who charge exorbitant interest rates. This increases the cost of construction and therefore the sale price of the house. If HFCS or banks of a certain threshold size are permitted to fund developers to acquire land for affordable housing, then the current high interest rates are likely to get rationalised. This in turn will help reduce the ultimate cost for a homebuyer.
A final point I wish to make is that infrastructural amenities need to be developed in conjunction with the construction of housing. One of the problems with affordable housing projects is that they are often constructed in far flung city outskirts where the land may be cheaper. There are at times few takers for such homes since the necessary infrastructure such as schools, hospitals and other civic facilities may not be available.
To conclude, the thrust on housing by the government, coupled with the demand for housing finance and the growth of the housing finance industry has made many investors positive about this sector. The sector has endured a number of unprecedented events over the past few years. But despite bracing such storms, the sector has always come out stronger than before. The lessons learnt are that there is no substitute for prudent lending. Relying on the basics of lending will lead to sustained long-term success.