The pandemic has led to favourable market dynamics and themes like affordable housing, stamp duty cut and low interest rate cuts are playing out. Housing demand has picked up. What is the current scenario and the outlook in coming quarters?
It has become much more attractive for a person to consider buying a house now. Housing is much more affordable today than it ever was. In the last four years or so, property prices really have not gone far. So from 2017 right up to now, property prices have more or less remained the same, but meanwhile, we had normal inflation of 4-4.5% and consequently over four years, a 20% inflation with property prices remaining the same.
In that period of time, income levels would have kept going up. One had a situation where income levels have kept going up, property prices have remained more or less the same and therefore in terms of affordability, it has become much more affordable compared to what it used to be in the past. In addition to the affordability, comes factors like the lowest ever interest rates on housing loans.
Different states have done different things to encourage people to buy a house. For example, in Maharashtra, there was a stamp duty cut from 5% to 2% and then 3%. All these are different factors which have contributed to the growth. We must remember that Covid has made it more imperative and necessary for most people to look for larger homes. In big cities like Mumbai or Delhi, 6-7 people often stay in a 450-500 square feet apartment. Now if husband and wife both are working from home in a small house, there is no privacy. Also, if one person gets stuck with Covid, it spreads to the entire family. All these factors have made people realise the importance of buying a house.
Another factor we must bear in mind is the stock market. The stock market has done particularly well over the last six to eight months and consequently most middle income people who have some investment in the stock market are now feeling richer, more confident and therefore are looking to improve the quality of their life by looking to buy a bigger or better house. We are seeing this phenomenon across the country.
Help us understand the dynamics high end versus affordable housing and the outlook on loan book growth — individual as well as non-individual.
When Covid first struck, our guidance to investors was that growth will come back gradually. We were pleasantly surprised with the pace at which the growth came back and right from August last year, every single month, the individual loan disbursements that we have done have been higher than what we had done in the same month in the previous year. So, that is the trend we have seen for a year now.
In fact, in December 2020, we saw the highest individual loan disbursements and that number got breached in March 2021. So we made the highest ever disbursements in March 2021. The second wave of the pandemic in May did slow things down temporarily for about a month or so but the momentum came back in June. So, June disbursements were 79% higher than May and July disbursements were 14% higher than June. The momentum has continued as we speak.
Also we must bear in mind that the average loan size would have inched up a little bit. Last year’s average loan size was around Rs 27 lakh. This year’s average loan size is about Rs 30 lakh which means we are also seeing properties being sold in the metropolitan cities where prices tend to be higher than what they are in tier II and III towns. We are seeing pan-India growth.
Given that you are a dominant market player, which geographies are showing pockets of relatively higher growth? Also, what are the key consumer trends that you are seeing in tier II cities versus metros?
I will say the demand is pan Indian. We are seeing demand in every part of the country — whether it is the metros or the tier II or III towns. The fact that is, Mumbai had a relatively slow growth during 2017 to 2020. When I say Mumbai, I mean central Mumbai and south Mumbai. They are the more expensive parts of Mumbai.
Otherwise the suburbs of Mumbai were always growing but the central part of Mumbai where property prices tend to be higher have seen a pick-up in growth particularly from September, October of last year. But the growth is coming across the country. It is coming as much in tier II, tier III towns as it is coming in the metro cities.
The good thing about real estate picking up is that the sector itself has a multiplier effect. Do you see disposable income coming back to pockets now? How do you see this having a multiplier effect because you would have the best understanding of what the income variables are, across categories right now.
Housing has a huge multiplier effect in the sense that it gives support to industries like cement, steel, paint, power all these other large industries, it also supports so many other small industries. The people who make nuts and bolts and various kinds of construction equipment. Also real estate or housing construction creates so many jobs — whether it is direct jobs in the construction business itself or it is indirect jobs in all these other industries. There is direct job creation for masons, carpenters, plumbers, engineers, construction workers and so on. So many jobs and livelihoods get created when housing gets a boost.
What are the permanent changes which you think Covid has brought out?
I will say the structural demand for housing in India will always remain strong, so leave aside Covid for a moment. Covid has made it more important for people to look for houses to buy now, but even apart from that, structurally the demand for housing in India is always going to be strong. It will be there not just for the next six months or one year or two years or three years, it will stretch out for more than a decade.
How affordable have houses become?
If you compare the cost of a house as a multiple of the annual income of an individual today and compare the same multiple 20 years ago, there has been a massive improvement in the multiples in the sense that housing has become much more affordable. While prices have not really gone up, income levels have gone up much faster in the last 20 years.
In India, the mortgage to GDP ratio is a little under 11%. Compared to countries like China and to advanced countries like the US and UK, it is much less. Therefore over the next 3-10 years, the growth opportunities will be huge.
The government has also been very focussed on the housing sector because of the multiplier effect that housing has on the economy. It is the demographics in India. Two-thirds of India’s population is below 35 years of age while the average age of a first-time home buyer in India is about 38 or 39 years. So a 20-25-year old person is not going to buy a house. It is someone who is already in his late 30s.
With two-thirds of the population being below 35 years, it really means that two-thirds of the population today has not even contemplated buying house but all these people, will get older in the next one, three, five, seven, 10 years and will get to an age where they will need a house. There will be a structural increase in the demand for housing and therefore housing loans. I see an upside for the housing sector not just in the short term but also in the medium to long term. Theoretically, there is the possibility of a downside if another major pandemic wave comes, in but these are remote possibilities according to me.
What about collection efficiencies?
When the pandemic happened, we told investors that in the short term, we can see a rise in non-performing loans because there are people whose livelihoods may have been affected. But we do not see that as a long-term problem at all for several reasons; one is the average loan to value ratio. At the time when a loan is granted, it is only about 67-68% and this will go for most players. All loans are prepaid in monthly instalments which start immediately. So with every passing month, the outstanding loan is declining and therefore the individual’s equity in the share of ownership of the property will keep increasing. Therefore, the likelihood of long-term default is very low.
In the short term, NPLs can go up but that’s it. To my mind, with every passing month post the second wave, we have seen collections getting better. The collection number for individuals was 98% when we last reviewed.
Banks and NBFCs have seen high provisioning. Are the balance sheets of most of the players healthy enough to weather any excess provisioning?
Everyone has been very conservative in their provisioning. We, in particular, have been very proactive at our provisioning, not just now, but even in the past. The actual provision that we carry today in the balance sheet is Rs 13,188 crore. If we were to calculate the provision strictly as required by regulation based on the period of default where you provide a certain percentage for six months and different percentages for different periods of delay, then the total provision we would have needed to carry would have been Rs 5,778 crore. Against that, we are carrying Rs 13,188 crore provision. Like us, most other players in the market would have been very conservative in their provisioning and therefore would have built up a large pool of provisioning.
You would have seen that credit cost as a charge to the profit and loss account for most players increasing over the last two or three years. But my personal view is that over the next two, three years, you would start seeing credit cost dominance.
In the last one odd year, housing finance companies have really slashed interest rates in a bid to lure prospective homebuyers. What is the competitive landscape like? Do you see severe competition coming by in terms of cutting interest rates?
I do not think there is any undue aggression from any of the established players. Interest rates have come down. Cost of funds of banks and other lenders have come down, giving the benefit of a lower cost of funds to their customers. I do not think there is any aggression but the June 30, 2021 numbers, which are in public domain show that housing loans in the banking system grew by about 9.6% over a one year period. HDFC’s individual loans during that period grew 14%.
So I would say there is competition in the market but it is healthy competition. The market itself is so large that I do not think anyone needs to do anything which is irrational or anything that will disrupt the market because the market itself has the potential to grow for a very long time.