Demand for housing is largely inelastic in India

Currently, Housing Development Finance Corporation (HDFC) is in the process of merging with HDFC Bank. Keki Mistry, Vice Chairman and CEO, HDFC, tells Joydeep Ghosh that between 2017 and mid-2020, housing demand from largely from Tier-2 and Tier-3 cities. However, proactive actions by states such as reduction in stamp duty and other measures have helped improve demand from Tier-1 cities. Excerpts:

There has been a good demand for housing loans. With interest rates on an upswing and growth slowdown, can this demand sustain?

I believe that you will always see a long-term structural demand for housing due to factors such as improved affordability, favourable demographics, increasing urbanisation and rising aspirations.

The demand for housing remains insatiable in a country like India which has a huge housing shortage. There is tremendous potential for growth as the penetration level of mortgages in India is extremely low compared to other countries. The mortgage to GDP ratio in India is 11% compared to 20-30% in most East Asian economies, 68% in the UK and 52% in the US.

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India has favourable demographics. 66% of our population is under the age of 35 years. Putting this in the context of housing, the average age of a first-time home buyer in India is about 38 years. This means that in reality, two-thirds of the population has not even contemplated buying a home yet. However, in the coming years, all these younger people will get to an age where they will necessarily have to buy a home.

Now coming to your question of whether the demand for housing will continue despite higher interest rates. Demand for housing has proved to be relatively inelastic even in a higher interest rate environment due to two main reasons. One, it is the single largest investment a person does in his or her lifetime and is a long-term loan unlike a car or consumer loan. If the property is liked by the family and is affordable in the context of the income of the individual, most people would go ahead and buy it, irrespective of interest rates.

Two, these loans are typically long-term loans with an average of about 15 years. In India, most opt for a floating rate loan so they get the benefit of falling rates and vice versa. So, it makes a much lesser difference from an economic standpoint in a long-term loan as compared to a short-term loan.

In the post-Covid environment, has there been any change in the housing demand? For example: Has the demand risen in Tier-2, and Tier-3 cities risen vis a vis Tier-1cities?

The housing demand from Tier 2 and Tier 3 cities has always been strong. In fact, during the period 2017 to mid-2020, the demand was largely from the Tier 2 and Tier 3 towns while demand for housing from the more affluent parts of the major metro cities was somewhat subdued.

Realising that housing is a huge employment creator, several states introduced time-bound relief measures during the pandemic, such as reducing stamp duty, to promote housing to create job opportunities in the cities. As a result, demand for housing in the metros began to increase and this growth momentum has continued.

The demand today is coming from across the country including the metros. During the earlier 3 years leading up to mid-2020, house prices in metros had generally remained unchanged while the income levels of people had continued to rise.

If one assumes an average rise in annual income by about 7% to 8%, then over a 3 to 4-year timeframe, incomes would have increased by more than 30%. With higher incomes and more or less the same property price as before, affordability improved.

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This fact has been reiterated by a 2022 report by Morgan Stanley, which states “India’s young workforce stands to benefit from affordability at almost unprecedented levels in terms of mortgage payments relative to income growth.” This, coupled with the strong feel-good factor in the economy and the need for bigger and larger homes due to Covid, fuelled the demand for housing in the metros.

HDFC’s exposure to construction finance has been consistently going down – from 14% to 9%. Going forward, has HDFC taken a conscious decision to prune its exposure in this segment?

It has not been a conscious decision to reduce the exposure. The reason for the decline was that the period between 2017 and 2020 saw some degree of stress in the real estate sector, in metros especially, Mumbai and Delhi. And because of this stress, developers were left with unsold properties, which were ready but had not been sold. And because of this, there were not too many projects that were launched during that time. The real estate sector in metros started picking up from October 2020 because of several factors which I mentioned earlier.

So, after 2020, several new projects have got launched. RBI’s recent Bulletin has stated that in the construction sector, both cement production and steel consumption have maintained growth momentum and recorded double-digit growth in October 2022 compared to pre-pandemic levels.

We see a healthy pipeline of construction finance loans. However, it needs to be noted that construction finance loans have a longer disbursement period as they are disbursed based on the progress of construction and after the developer has brought in his equity. For instance, if you finance a project in Mumbai or Delhi, it will typically take between three to five years to complete the project depending on the size of the project.

While the HDFC-HDFC Bank merger has received almost all clearances, what is the timeline for completing it?

Our best estimate at this point is that the merger process should be completed by June 2023.

Do you think the relevance of large NBFCs is over with the regulatory arbitrage benefits gone? What can some of the large NBFCs do as most of them are owned by corporate houses that are not allowed to enter banking?

In my opinion, NBFCs often cater to segments that banks are unable to cater to.

Many NBFCs specialise in lending to a particular sector, developing skill sets that are unique to that customer base and hence can better manage risks while simultaneously driving growth in that sector.

Many unbanked borrowers avail credit from NBFCs and later use their track record to become bankable borrowers. NBFCs in effect, play the role of intermediaries – particularly in the small-scale and retail sectors.

The financial needs of the Indian economy are diverse and cannot be fulfilled by the banking sector alone. For instance, in India, the consumer credit to GDP ratio stands at 18% — among the lowest in the world for a large economy. In comparison, consumer credit to GDP is 80% in the US and 40% in China. So, the scope to grow and the needs are immense.


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