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Affordable Housing (Finance) For Better & Inclusive Society

Housing finance companies need to reinvent themselves and look into new products like funding rental housing, which is the cornerstone of affordable housing and planned cities in developed economies like Netherlands.

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Affordable Housing has been receiving its due-attention from policy makers, in the recent few years. This has given impetus for the housing finance sector, especially those serving the lower-priced affordable housing segment.  This is contributing to the social development as well direct & indirect socio-economic benefits for the long-term. The realty sector being a large employment generator in the economy, with linkages to nearly 300 industries across its value chain, benefits from focus on housing demand.

Social benefits of affordable housing 

Access to affordable housing provides stability for vulnerable families and helps improve healthcare due to better sanitation and living conditions.

Access to quality affordable housing helps create a stable environment for children by reducing frequent family moves and to improve their social-skills as they are better accepted by their peers.

Families with “pucca” houses see that the education of their children continue unhindered; the mental health and well being of these families increases with better quality habitat.

Affordable housing helps increase the discretionary income that low-income families have available to meet other needs or save for the future. 

In India, the societal perception generally looks at owned-houses as a notch-above than the tenants. This helps improve the house owner-residents acceptance in the local community.

Union budget 2021-22 

Keeping in line with the mini-budget like relief packages announced earlier in past few months of Covid lockdown, in the Union Budget 2021, the Honble Finance Minister has  proposed to extend the current benefits provided for affordable housing by a year. 

"This government sees housing for all and affordable housing as priority areas. In July 2019 Budget, I provided an additional deduction of interest amounting to Rs 1.5 lakh for a loan taken to purchase an affordable house. I propose to extend the eligibility of this condition by one more year to 31st March 2022," the minister said in her budget speech.

The additional deduction of 1.5 lakh shall therefore be available for loans taken up to 31st March 2022, for the purchase of the affordable housing, 

The finance minister also mentioned that the Centre is committed to promote supply of affordable rental housing for migrant workers. For this purpose, the FM has proposed to allow tax exemption for notified affordable rental-housing projects.

Given the focus of the Union Budget on infrastructure, housing, and manufacturing sectors, these investments impact will be seen in the near term via multiplier effects. The measures announced will boost the recent momentum in housing demand and help create (more) jobs. 

Housing Finance industry

Over the years, Housing Finance Companies (HFCs)  have become more interconnected with the financial system; being the second largest borrower of funds from the financial system, with gross payables of around ₹6.20 lakh crore as of end-September 2020. HFCs focused on affordable housing consumers have grown faster than the industry in the past five years (26% growth in 2020). 

Though Indian households hold real estate as a significant (physical-form) asset consisting of about 78% of total assets, the mortgage penetration remains extremely low at 11%, indicating a large headroom for growth. 

Home affordability is at best level in over a decade at 3.5 (measured as a ratio of property value to annual gross income). Added to this is the current interest rates being all-time low ( nearly 300 bps lower than five years ago) . Demand is expected to revive faster in the affordable housing segment leading to high double-digit growth, led by the anticipation of a faster revival of rural economy and niche availability by lenders.

Unlike the large HFCs and banks whose significant client base is prime salaried, affordable housing companies cater to self-employed customers of ‘Bharat’, the customers of semi urban and rural areas. There is huge untapped potential beyond the top-7 cities, in the next 30, Tier 3 / 4 towns; these cities majorly comprise of lower and middle groups, classified on basis of annual income of INR 2 to 10 lakhs (EWS and LIG segment). With growth of MSMEs and their added wealth creation, they would add to further growth of the Housing Finance sector.

The typical customer in these locations is a self-employed individual with business vintage of around 10 years and is majorly into retail businesses hailing from ‘Rurban’ areas who is looking to buy his first home. These customers have the ability and requisite cash flows to service the loans, but due to the semi-documented nature of their income, they are not catered by mainstream lenders.

Debt markets, Digital & innovation

 Affordable housing sector is set to be disrupted with advent of technology and digital. This is  evident from the high investments in technology front, including emergence of PropTech companies. Conventional thinking of HFCs is bound to get disrupted as our market embraces mobile telephony much more than now. The JAM-trinity has already showcased how technology can bring in added access and convenience to the rural consumers. 

HFCs which have distinct & differentiated  capabilities in understanding the nuances of stratified consumer segments, credit & risk assessment, agility to transform, adaption to technology & data science will be in better position to increase their market share. 

The interest-spreads are also expected to remain intact, primarily due to NHB’s low-cost refinance schemes. The credit linked subsidy scheme has helped in realising the dream of owning a home for many families. With pro-consumer policy framework, adequate-capital and adoption of deep-tech, NHB could emerge as the Fannie Mae and Freddie Mac of India. 

Housing finance companies need to reinvent themselves and look into new products like funding rental housing, which is the cornerstone of affordable housing and planned cities in developed economies like Netherlands.  

Access to continuous cheaper cost of funds, either directly or as refinance for affordable housing projects, would give further impetus to the government policy initiatives. The domestic debt market has to be developed further from its limbo state. This would help in the ‘supply’ side of the HFCs and take us closer to achieving the “Housing for all”.  Clearly, housing finance sector needs further encouragement, as they continue contributing to the nation-building exercise.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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Srinath Sridharan

Independent markets commentator. Media columnist. Board member. Corporate & Startup Advisor / Mentor. CEO coach. Strategic counsel for 25 years, with leading corporates across diverse sectors including automobile, e-commerce, advertising, consumer and financial services. Works with leaders in enabling transformation of organisations which have complexities of rapid-scale-up, talent-culture conflict, generational-change of promoters / key leadership, M&A cultural issues, issues of business scale & size. Understands & ideates on intersection of BFSI, digital, ‘contextual-finance’, consumer, mobility, GEMZ (Gig Economy, Millennials, gen Z), ESG. Well-versed with contours of governance, board-level strategic expectations, regulations & nuances across BFSI & associated stakeholder value-chain, challenges of organisational redesign and related business, culture & communication imperatives.

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Sandeep Menon.

Financial services leader & entrepreneur

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