Housing Finance in India – Growth factors

Investment in and sale of commercial properties are recently gaining popularity in India to real estate prices hitting an all time low and attractive schemes being offered by various housing finance companies and banks. The market has been buoyant with investors not just looking at an attractive investment proposition, but also gradually moving towards investing in commercial properties.

A developer who comes up with a new property rents it out and then sells it. While the investor gets an assured return, the developer churns out enough money to invest in the next project. In these type of deals, an investor in a commercial property enjoys returns from day one, which can be anywhere between 12 and 13 percent. This is in contrast to returns on a residential property, which will be in the range of 5 to 6 percent.

Investing in a bank would generate hardly 6 to 7 percent interests, while the stock market is risky. Real estate will offer at least 10 to 15 percent returns, depending on the locality. Investment in and sale of commercial properties is a well established institution in the West, where they have a number of real estate mutual funds, as well as individual investors. The investors in India expect the market to grow rapidly once restrictions on foreign investor to invest in real estate are waived.

The foreign companies are governed by RBI and FERA norms, which do not allow them to invest in real estate in India. Once these restrictions are waived, one will definitely see the emergence of real estate mutual funds in India too.

Housing finance has received a boost through a combination of growing demand and rising affordability. While the demand for housing has always been there and will be for a long time to come, its increased affordability has been the key to growth. According to HDFC, every rupee spent on housing leads to a 78 paise increase in GDP. The positive fallout of real estate development on industries such as cement and steel has led the government to provide a fiscal stimulus for housing finance over the last few years. Between 1999 and 2001, the Union Budgets have provided significant tax benefits on housing loans, thereby offering fiscal stimulus to savings towards the construction sector.

In other words, enhanced affordability has spurred an increase in the demand for housing loans. The key to high growth rates in the housing finance business will continue to be affordability. Following are the factors responsible for the growth of housing finance services in India:

Budgetary Support:

Tax benefits, a low interest rate regime and high salary levels among certain sections are chiefly responsible for fuelling fast growth in the housing financial services sector. Tax benefits for housing finance contribute to housing development. For this purpose, RBI maintains a soft interest arte regime. The bank rate of interest is constantly being slashed so that it acts as a stimulant for housing demand.

Similarly, a sharp increase in size of pay packets has played an important role in making a house affordable. Regardless of salary levels, if the cost of a house comes down, it would pep up the demand for housing finance. There is reason to believe that we are witnessing a gradual movement towards loosening the restrictions that increase the cost of a house.

New Dynamics:

An important development in the housing finance business has been the entry of new players. The relatively low risk in a housing portfolio has spurred new entrants in the last few years. Arguably the most significant entrant has been ICICI Home Finance. Among non-banking finance companies, Sundaram Finance and Tata Finance have launched housing finance subsidiaries in the recent past, while banks shown increased interest in acquiring housing assets.

The entry of new players and the consequent increase in competition has been followed by an interesting trend. The interest rates of most housing finance companies (HFC) move in unison, thereby suggesting that interest rate is not likely to be a competitive tool. The high level of competition has made it impossible for an HFC, with branches across the country, to charge an interest rate higher than the competition. Commercial banks are an exception to the rule, in the sense that they always charge lower than the competition.

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