Over the course of one week, two major announcements have been made by the government and the Reserve Bank of India that could catalyse the housing sector.
In his Budget speech, finance minister Arun Jaitley announced major initiatives for the affordable housing segment and has earmarked Rs 4,000 crore up from Rs 2,000 crore last year to the National Housing Bank (NHB) for giving credit to housing finance companies for lending requirements of the urban poor.
This was followed by an announcement from the RBI on Tuesday that allowed banks to raise long-term soft funds from the market to finance soft lending for home buyers for up to Rs 50 lakh for property values of up to Rs 65 lakh in the six metropolitan centres: Delhi, Mumbai, Kolkata, Chennai, Bangalore and Hyderabad. In other cities, the upper limit will be Rs 40 lakh for houses of values up to Rs 50 lakh.
The RBI has not stopped there. It has said that it would review periodically the definition of affordable housing taking into account inflation.
Housing finance companies say their cost of borrowing would come down and also make it easier for the middle income segment to own a house. “The move will result in bringing down the cost of borrowing and allow the lower income category to own a house. Also the new limit of Rs 50 lakh for six metros is more realistic,” said Keki Mistry, vice chairman, HDFC.
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The real estate industry has welcomed the move. “This is indeed a very welcome measure as it will enable the home buyer to access cheaper home loans which in turn is a step in the right direction to provide housing for all by 2022. It would be even better if taking a lead from the RBI, affordable housing per se is be given infrastructure status,” says Getamber Anand, President-Elect, Credai.
“Clubbing affordable housing with infrastructure and allowing priority sector lending will allow the sector to finally access cheaper funding. Home buyers will also benefit since the mortgage rates are expected to reduce for affordable units as costs reduce for banks,” says Sanjay Dutt, Executive Managing Director- South Asia, Cushman and Wakefield.
An estimate says that it takes more than five year’s annual income to pay for a house in the non-metro cities. As a result the available housing stock is priced mostly out of reach for even middle income housing groups. The shortage of houses in urban India is estimated at close to 19 million as per NHB data.
Given the staggering proportions of the demand, it would take more than cheaper loans to fill this gap. The supply of houses at affordable price points needs to increase, which is easier said than done.
However, the demand in this segment is huge and presents an opportunity waiting to be tapped. Monitor Deloitte, a consultancy, in a recent study on the low income housing market, has estimated the number of households with a monthly household income ranging between Rs 7,500 – Rs 25,000 at 2.2 crore, which translates into an opportunity worth Rs 1.1 lakh crore.
The study, however, says that the market remains underserved due to policies and lack of financing options for such home buyers.
Raghav Garg, director of Landcraft Developers agrees. “Existing government regulations and development norms discourage private sector participation for low income housing. There is a need to bring in private sector participation in this sector,” says Garg, whose company has built an affordable housing project called Dinesh Nagar in Pilkhuwa, 50 km from Delhi, with home prices in the range of Rs 7 lakh to Rs 10 lakh.
Almost all states have affordable housing policies where housing for low income groups is done with the state as a partner, leaving little room for private players to enter the space.
In Uttar Pradesh for example, the target beneficiaries are identified by the state and the home prices too, are fixed by the state. Essentially they are state government projects, and a private player can enter this space mostly as a construction partner.
“In fact, the regulations are so regressive that it is far easier to build slums and get them regularised rather than enter the low-income housing space,” adds Garg, whose project was approved under the affordable housing scheme of the Uttar Pradesh government, and claims that home prices in his project are lower than government low-income housing schemes.
Even in cities where private players are active in the affordable housing space, the Monitor Deloitte study has found that 70 per cent of such buyers are in the informal sector but need access to loans in order to buy the house.
Banks are not active in this space, but housing finance companies are. The drawback, however, is that housing finance companies borrow at high costs and consequently their lending rates vary anywhere between 11 per cent to 19.5 per cent, translating into equated monthly instalments that range between Rs 6,000 to Rs 9,000, which is steep.
RV Verma, former chairman of the NHB says that the funds the government gave towards affordable housing has been fully utilised and in fact the demand for loans is high. “The money has been fully utilised in the past and there is a huge demand and absorption capacity for the same as a large number of intermediaries—housing finance companies, banks, regional rural banks are using this facility. NHB makes this money available to the intermediaries at almost 2-3 per cent lower than their normal cost of funding and charges a minimal spread,” says Verma.
Garg, however, worked around the problem for his project. Public sector banks, as compared to housing finance companies active in this space, have far lower rates of interest ranging from 10.25 per cent to 10.75 per cent. “There is a necessity for public sector banks to be active in this space for that has scope to reduce interest costs for the borrower. How will interest subvention schemes work, when the loans do not reach the borrower?” says Garg.
He found that the problem lay in the credit assessing norms that public sector banks employ, which equates high income and low income borrower. He successfully got the State Bank of India to design new credit assessment norms that take into account the circumstances of the borrower in this segment. This could reduce the EMI burden on the borrower by Rs 2,000-Rs 3,000, which is a substantial saving.
Bankers are waiting for the first bond issues to see how the market shapes up, but are optimistic. “We will have to wait and see how banks are planning the bond issues. Home loan rate will depend on the cost of raising such funds. But I think the interest rate environment is going to be better for housing loans. You can expect a rise in demand and a decline in rates,” says M Narendra, chairman and managing director, Indian Overseas Bank.
But the ground level, this segment too faces the same hurdles as any other housing project. “Regulatory hurdles run from getting development plans sanctioned to ensuring pollution control, among others. Construction can begin only after all these clearances are obtained, which often takes as long as three years. Add to these three more years of actual construction time. As a result of these impediments with various government agencies, a project takes about five to six years to complete,” said Sachin Sandhir, MD, RICS South Asia, a standards and certification body for the real estate sector.
Given the government’s push for ‘housing for all’ by 2022, there is hope that sound policies will follow now that the finance window has been opened up in the Budget. “The developer community is hopeful that in the coming years, affordable housing will be the next big story in the Indian economy,” says Garg.