“Housing wealth – the net equity held by households, consisting of the value of their homes minus their mortgage debt – is the most important source of wealth for all,” said Janet Yellen, the economist and former Chair of US Federal Reserve.
Globally, real estate is equated with real wealth as most fancy buying real estate – as a real asset and not just on paper – which gives certain appreciation over the long term and a sense of protection.
In India, too, a home is where the heart is for most of us.
The country’s ascension as the world’s most populous nation amid rapid urbanisation is leading to a massive expansion in the breadth and length of our cities. More so given that India still has a sizable portion of its land under cultivation despite the declining GDP contribution of agriculture. Farming community is dependent on other avenues for livelihood, leading to increasing urbanisation. Estimates show that in another two decades or so, India could be a predominantly quasi-urban society rather than a drifting commune on a pastoral vast land.
Urbanisation to drive Realty
With over 18% of the global population crammed in just 2.4% of the available land on the Earth, India is bound to have an increasing value attached to its homes. Besides the traditional and individual conjectures associated with real estate as a protection, as an ultimate wealth sign and even as a symbol of personal prestige and pride, the real estate also contributes a huge amount to the national GDP as an economic multiplier. It is often touted as the one and perhaps the only industry that is connected to over 200 other commercial streams.
The implementation of Real Estate (Regulation and Development) Act, 2016 was the proverbial pivot that lifted the fortunes of both developers and home buyers, bringing in the much need clarity and stability to the market. According to the Reserve Bank of India data, the All-India Home Price Index (HPI) – based on the registration data of top ten cities – went up by 4.6% to 303.9 as of March 2023 against 290.6 in March 2022. The figure is as high as 16.3% in Bengaluru and 6.65% in Delhi. In Q4 Fy23, the house sales grew by 21.6% while new launches kept a steady pace, reflecting a healthy optimism among users and investors. The trend is no surprise as historically seen, the HPI has gone up by nearly 10% in the last three years despite the rise in interest rates and property prices.
Mortgage – Huge prospects to grow
The emergence of a favourable ecosystem with factors like – a low interest regime till mid-2022, greater affordability and stable market rates across major cities, abundant supply, focus on affordable housing and infrastructure development amid a sustained economic growth – had given a considerable traction to the housing finance. Yet, India’s mortgage penetration still remains low at an estimated 13% of the GDP as against over 60% in the US and mid-30% for China in Fy23. Thus, the mortgage market holds a tremendous window of opportunity to grow.
Affordability remains attractive
The banks dominate the Indian home mortgage finance market (with a share of 62% as of March 31, 2022) – which also has few large Housing Finance Companies – offering both fixed rate and floating interest rates and tenures of up to 25 – 30 years. Estimates show that the total home loan market is valued at Rs 24 lakh crore and the share of housing loans in total loans has gone up over the last eleven years to 14.2% in March 2023 from 8.6% in March 2012. The increasing affordability and growing incomes have been boosting the growth of housing finance market which is all set to grow at a CAGR of 20% between 2022 and 2027, as per various estimates.
Interestingly, there is a distinct diversification in the profile of home loan borrowers. Even though the average age of the first-time buyer remains high at 37-39 years, since 2021, India has seen the surge of confident Millennials and young borrowers, coming forward to avail housing finance. In fact, the demand for first homes and home upgrades has been rising for some time. Since Covid, buyers prefer larger living spaces with better planning for work from home and study from home possibilities. They are also looking for self-contained, integrated housing societies that offer safety with premium amenities.
An Assocham report says that 13% of India’s GDP will be generated by the housing industry by 2025 with the real estate sector hitting Rs 65,000 crores by 2040. The increasing housing affordability since the last 8-10 years is attracting new customers. Foreign investors who spent US$10.3 billion on commercial real estate between 2017 and 2021 also demonstrated the growing interest in Indian realty.
Affordability-wise, estimates show that in FY 2000, property prices were around six times of the average annual income of the typical borrower. By FY2020, this had gone down to an average of 3.3 times the annual income of a buyer, improving the outlook. Though the recent hikes by RBI have made home loans dearer, they remain below the historic average, making it ideal to avail home finance now.
Go for it, now
Asked about his best investments once, Warren Buffett once said, “All things considered, the third best investment I ever made was the purchase of my home; the two best investments were wedding rings.” You don’t have to be a genius like Buffett to read the emerging picture in the real estate space. Growing urbanisation will continue to push up the demand for dwellings, increasing prices steadily across cities. The existing quality inventory of ready-to-move houses in many cities is being steadily gobbled up by buyers who find the current interest rates affordable, but also factor in a rate cut or two sooner in their overall calculations.
With such a favourable cycle, a significant part of the mortgage could be paid off in the next few years before another upward cycle begins when the investment may also start getting some capital appreciation. As the clamour for more tax benefits on the loan interest rate and principal grows from India’s vast middle class, the government may eventually consider the options, giving more benefit to home buyers.
In toto, if you are considering a mortgage, it’s time to be at home.
(Disclaimer: The article has been authored byn- Virat Diwanji, Group President and Head – Consumer Banking, Kotak Mahindra Bank. All views expressed are personal.)
