Road to India@100: Unlocking India's economic potential
I am fully confident that India will realise its true potential in the next 25 years. The reason for my optimism is that India has, over the years, successfully weathered several financial storms, geopolitical uncertainties as well as the devastating pandemic only to rebound as a stronger and resilient economy.
With regard to housing and real estate, this sector holds the key to unlocking the potential
Employment generator: Housing is one of the largest employment generators in the economy with linkages to nearly 300 industries, both in terms of direct jobs and the jobs it creates in ancillary industries.
Low penetration levels: Mortgage penetration in India is extremely low, which implies a huge potential for growth. For example, the mortgage-to-GDP ratio in India is 11 per cent compared to 20-30 per cent in most East Asian economies, 68 per cent in the UK and 52 per cent in the US.
Inelasticity: Demand for housing has proved to be relatively inelastic even in a higher interest rate environment. There are a couple of reasons for this:
a. Housing is the single largest investment a person does in his or her lifetime. If the property is liked by the family and is affordable, most people would go ahead and buy the house irrespective of interest rates.
b. Housing loans are typically long-term loans with an average tenure of about 15 years. In India, the overwhelming majority opt for a floating rate loan. In a floating rate loan, the customer gets the benefit of falling rates when rates come down and pays higher costs when rates go up. Hence, over a 15-year period there are several phases of higher and lower rates. So, it makes a much lesser difference from an economic standpoint.
Improved affordability: Around 25 years ago, it would have taken nearly 20 times a person’s annual income to be able to afford a modest-sized home in most cities in India. Today, this affordability ratio has improved to about 3.2 times the annual income. Additionally, fiscal incentives by the government have played a key role in encouraging people to borrow to buy a house.
Continuing reforms: There has been a huge thrust by the government on enabling housing and real estate policies. For instance, the establishment of the Real Estate (Regulation & Development) Act (RERA), 2016, protects the interests of homebuyers. The introduction of RERA has been one of the most significant reforms in real estate in recent times. It aids not just buyers but also developers as it infuses transparency in the housing sector.
Rapid urbanisation: India is rapidly urbanising with 32 per cent of the population residing in cities. It is estimated that 40 per cent of the population will be living in cities by 2030. Urbanisation, coupled with increased incomes, have resulted in a huge rise in the number of households looking for new homes.
Demographic profile: Unlike the West, people in India do not buy a home when they are in their 20s. The average age of a first-time homebuyer in India is about 38 years and currently, about two-thirds of the population is below 35 years of age.
Hence in the coming years, all these young people will get to an age where they will necessarily have to buy a home. And with the confluence of all the factors mentioned above, the structural long-term demand for housing and housing finance in India will continue to be very strong for the next 25 years.
In light of the above factors, a few suggestions may be considered for the sustainable growth of the housing sector, as listed below:
Leveraging technology: Technology has enabled developers to virtually showcase their properties. Similarly, home loan providers, too, have leveraged their digital platforms to continue to serve new and existing customers.
However, digitalisation of the Indian construction industry is still in its infancy. It is estimated that the real estate sector spends less than 1.5 per cent of its revenue on technology. The role of technology and innovation has become extremely important. There are, thus, now tremendous opportunities for property technology or prop-tech companies. New technologies will play a vital role in creating efficiencies in the real estate sector.
Digital signatures: With Indian consumers increasingly relying on technology for their financial transactions, digital signatures to execute property-related documents could be introduced. It would immensely help the homebuyer to complete a digital end-to-end purchase. Positively, the authorities have released a notification that allows home loans to be brought under the digital documentation category.
ESG: There needs to be an increased focus on ESG, or environment, social and governance. Over the medium-term, most of the incremental funding to real estate developers is inevitably going to have ESG covenants embedded in it.
Mortgage guarantee product: As lenders focus and penetrate more deeply into this segment, I do envisage that the mortgage guarantee products will become an essential component, especially in lending to low-income groups. It is a product whose time has come.
In conclusion, I remain extremely optimistic about India’s growth in the years to come. The main reason for my optimism is that India is a strong domestic consumption-based economy and financial penetration levels are so low in India that the scope for businesses to continue growing remains immense.
Similarly, there are several converging factors that will ensure the sustainable growth of the housing and real estate sector. India is fortunate to have a number of visionary policymakers and sensible regulators to ensure that the housing sector moves forward and achieves the next level of growth.
The writer is Vice Chairman & CEO of HDFC Ltd
