2 Housing loan growth has been decelerating despite moderation in house prices and interest rates
Housing is an important, and for many Indian households, a once-in-a-lifetime investment. Because construction continues to be among the most important sources of employment outside agriculture – the 2018-19 Periodic Labour Force Survey shows it has a share of 12.1% in employment, the second largest, after agriculture – housing demand is also important for the rest of the economy. The Narendra Modi government is actively promoting the goal of house ownership for all Indian households and the 2020-21 budget announced an additional income tax incentive for affordable housing.
These incentives have been continued in the 2021-22 budget. Because interest rates have come down significantly in the post-covid phase – RBI reduced policy rates by 115 basis points between February 6, 2020 and May 22, 2020 – housing loans have also become cheaper. RBI data on house prices shows significant moderation in house prices. RBI’S house price index is based on transaction-level data received from housing registration authorities in 10 major cities (viz., Ahmedabad, Bengaluru, Chennai, Delhi, Jaipur, Kanpur, Kochi, Kolkata, Lucknow and Mumbai). These developments taken together should have led to a rise in demand for housing loans. However, this does not seem to be happening, as can be seen from growth in outstanding housing loans (including priority sector lending) until December 2020.
Madan Sabnavis, chief economist at CARE Ratings, said “the slow increase in housing price indices is indicative of a rather sluggish demand pattern coupled with large stock of unsold inventory”. “As demand for houses grows slowly there is also a tendency for demand for credit for the same to be slow since there have been job losses as well as salary cuts which have not yet been reversed across sectors and companies.”