India home lending to bounce off 11-year low on strong outlook – analysts

Home loans business, a relatively safer segment of banks' lending, is expected to bounce back after falling to an 11-year low in India as the government gives incentives for people to own their own houses, builders drop prices amid a glut and pent-up demand comes to the fore

File photo
File photo

Outstanding home loans at banks grew 7.6% year over year in the April-to-February period of the last fiscal year that ended March 31, according to the latest Reserve Bank of India data. That was the lowest since the year that ended March 31, 2010, according to analysis of the central bank data by Jones Lang LaSalle. Despite record-low interest rates, demand failed to pick up as an oversupply, especially of under-construction homes, and the government's efforts in the last three years to reduce malpractices in the sector disrupted the industry.

Amid the churn caused by new rules, such as the goods and services tax and a new law to ensure greater accountability in the real estate sector, several builders collapsed, leaving behind ghost townships where construction had come to a grinding halt. But many of those issues have been addressed, and buyers now feel more confident about purchase decisions, according to industry experts. Interest rate subsidies and grants by the government for the weaker sections of the population under its housing for all program would add impetus.

Apart from commercial reasons that include more choices for buyers and low interest rates, with the resurgence of the COVID-19 pandemic in India, "people have realized that they would like to stay in their own houses and environment which are more hygienic and sustainable," said Monu Ratra, CEO of IIFL Home Finance, the mortgage lending unit of Indian nonbanking finance company India Infoline Finance Ltd.

The total housing loans outstanding in India, including banks and home finance companies, is about 21 trillion rupees, which is "hardly any sizable number" to the total size of the Indian economy. "We expect that for the next couple of years, a minimum of 15% to 18% growth on this would be something that should hold on and with the government's agenda of housing for all being pushed harder ... this growth doesn't look far-fetched," Ratra said.

Recovery in sight

In an indication of accelerating growth in the home loans segment, Housing Development Finance Corp. Ltd., India's biggest home loans company, reported a 30% year over year increase in its net profit for the quarter ended March 31, helped by a strong operating performance. "With COVID uncertainty lingering, we think mortgages will be the most resilient segment," Nomura said in an analysis note on May 10. Disbursement grew 60% year over year in the March quarter, which "highlights a favorable macro environment" for large housing finance companies, it said

"Residential real estate will not be an exception [to the economic impact of the disease resurgence] and is expected to see a brief pause as the home buying process is disrupted at different stages," said Samantak Das, chief economist and head of research at Jones Lang LaSalle. However, "other factors remain unchanged for home buyers. Residential demand is expected to revive again as the pandemic is brought under control and we believe that this impact is likely to be short-lived," he said.

The number of unsold homes in major Indian cities has been falling as builders slowed new launches and buyers returned. The inventory of unsold homes fell to about 442,000 units in March, from a peak of 714,000 in 2014, according to data from the Indian unit of Knight Frank LLP, a property consulting firm.

"Homebuyers are looking at upgrading their houses with increased demand for bigger and better homes. The increased housing demand is also being supported by multiyear-low house prices and multi-decade-low home loan interest rates," said Rajani Sinha, chief economist and director of research at Knight Frank (India). "Due to the pandemic and not despite it, the demand side of housing market has got a boost."

House purchase affordability is at its best level in a decade and many banks are now offering home loans at about 6.7%, a level that was not seen even during the Global Financial Crisis of 2008, Sinha said. "To begin with, India has a housing shortage and along with it we have a home loan penetration of just around 10%. With the ... demand catalysts prevalent for some time and improvement in the quality of supply, we expect that the credit demand for housing will be strong in coming years, she said. However, the trajectory "will be influenced by the evolving pandemic scenario."

For banks, home loans offer the security of the house as a mortgage. "The banks, in these uncertain times, are more focused on secured lending product segments and residential mortgage, given fully collateralized, is the preferred product segment for most of the banks," said Kunal Shah, an analyst at ICICI Securities Ltd., the brokerage and investment banking arm of India's second-biggest private sector lender ICICI Bank Ltd.

As of May 10, US$1 was equivalent to 73.40 Indian rupees