ASSIGNMENT ON REAL ESTATE FINANCE

HOUSING FINANCE SCENARIO IN INDIA

SUBMITTED TO PROF. SANJAY CHATURVEDI

SUBMITTED BY: GROUP III INDERJEET SINGH (246) RAKESH SETHIA (259) GAURAV ANAND (303) GAURAV BANSAL (307) VARUN CHAUDHARY (310)

TABLE OF CONTENTS
Introduction.................................................................................................2 Market Size .................................................................................................2 Growth Trends ............................................................................................3 Changes In the housing finance scenario....................................................4 Outlook for the Housing Finance Sector in India.......................................5 Key issues ...................................................................................................6 Conclusion: .................................................................................................7 Bibliography and References:.....................................................................8

INTRODUCTION
There was a time before 90s when housing loan was too expensive in the country and was not a popular instrument. Facts speak for themselves. The housing mortgage market which stood at over $6 billion in 2001 is today estimated at a mammoth $18 billion. The mortgage market is mushrooming by a hefty average growth rate of 3040% on an annual basis. A recent World Bank report clearly indicates that India is a major evolving mortgage market in Asia. This sums up the frantic churnings in the Indian housing loan scenario which have provided that much needed shot in the arm to the domestic real estate sector. The housing finance sector in India has undergone unprecedented change over the past five years. The importance of the housing sector in India can be judged by the estimate that for every Indian rupee (INR) invested in the construction of houses, INR 0.78 is added to the gross domestic product of the country. The construction sector including housing, exhibited double digit

growth rates over a three year period. The buoyancy in growth is likely to continue in future and the economy may reach a growth rate of 10 per cent in the coming years.

MARKET SIZE
India possesses the elements of very strong demand growth on the housing market in the coming decades. In a very conservative (and unlikely) scenario in which the average household size remains constant at the present-day level, the backlog of demand cannot be unwound and no shifts in quality take place, each year some 4.7 million housing units would have to be completed up to 2030. The total number of houses that would be required cumulatively during the Tenth Plan period (2002-2007) is estimated at 22.44 million dwelling units. However, this official estimate is based on the 1991 Census and unofficial estimates peg the current housing shortage in India at 40 million units. Further, the Tenth Five Year Plan has estimated an outlay of INR 7,263 billion to the housing sector, of which the contribution envisaged from public institutional sources, is only INR 4,150 billion.

Therefore, substantial contribution from private sector players would necessarily be required to tackle the growing housing shortage.

GROWTH TRENDS
The Indian housing finance industry has grown by leaps and bounds in past few years. The sector has emerged as one of the outstanding successes over the last decade, second perhaps only to the countrys software industry. It is growing at an estimated rate of 28 to 30%. Total home loan disbursements by Banks and Housing Finance Companies (HFCs)
Table 1: Home Loan Disbursement Year
1999-2000 2000-2001 2001-2002 2002-2003

HFCs
9,812.03 12,637.85 14,614.44 17,832.17

Banks
9,911.35 9,787.24 14,744.85 33,840.53

Total
19,723.38 22,425.09 29,359.29 51,672.70

Y-o-Y Growth (%)

13.7 30.92 76

has

risen

from

Rs.29359.29 crores in 2001-02 to Rs. 51672.7

crores in 2002-03 witnessing a phenomenal growth of 76% during this period.

The growth has been mainly fuelled by certain fiscal, social and regulatory drivers: Changes in demographic profile including increase in the rate of household formation due to structural shift from joint family system to nuclear family Increase in disposable income levels due to decrease in marginal tax rates and increase in total income levels Tax benefits and other fiscal incentives announced in the Union Budgets Decline in the average house cost to annual income ratio to around 4-5 from 1114 during the last decade resulting in an affordable EMI as a percentage of monthly income Aggressive lending by banks to the housing sector due to lower credit offtake by the corporate sector, attractive spread and lower non performing assets

CHANGES IN THE HOUSING FINANCE SCENARIO

Interest rates: Interest rates largely remained benign, including those on housing loans, and are expected to remain competitively affordable in the coming years also. However, in recent times, the rate has started to move up as can be witnessed from the fact that during the last oneyear period, interest rates on housing loans have been increased twice by about 50 bps. The graphs below show the movement of SBI PLR, as well as interest rates on housing loans over the period 1988 to 2005.

Share in GDP: The accelerated growth of housing finance has resulted in an increase in its share in the GDP. Outstanding housing loans as a percentage of GDP has risen from 3.4 per cent in 2001 to 7.25 per cent in 2005 and 2005 and 8.50 per cent in 2006 The been

(estimated). figure has

pegged at about 9 per cent by the end of the 10th Plan i.e. 2007.

The fiscal concessions provided to individuals under Section 88 of the IT Act (now Section 80 C wherein the deductible amount is up to Rs. 1 lakh as compared to Rs.20,000 u/s 88 of the IT Act) in 1995 and Section 24 (B) in 1999 (deductible amount of interest repayment is up to Rs. 1.50 lakh), have led to an increase in demand for housing loans resulting in increased disbursements of housing finance by

primary lenders over the years. As a result, housing stock in the country increased from 148 million units in 1991 to 187 million units in 2001 and is expected to have further gone to 218 million units in 2007.

OUTLOOK FOR THE HOUSING FINANCE SECTOR IN INDIA

The Indian housing finance industry is on solid grounds and has interesting prospects. Given the size of the market, given the facts that there is a huge shortage of housing and given the low penetration level, housing loans will continue to grow rapidly and show strong growth for next few years. According to a study made by CRIS INFAC, the total housing stock (both new and used) that can be financed is expected to touch 47 lakh units in FY09 from an estimated 33 lakh in FY04. CRIS INFAC expects the housing finance market to record an annual growth rate of 18.8% to reach Rs. 1,34,700 crore by FY09. Housing finance companies are expected to grow by about 14.6% annually between FY04 and FY09. Housing finance portfolio is expected to grow from about Rs. 1,34,500 crore in FY05 to about Rs. 5,08,300 crore in FY09 at a CAGR of 30.5%.

Favourable socio-economic changes, realistic property prices, low interest rates, tax incentives and innovative products offered by housing finance companies augurs very well for the growth of the housing sector. Moreover securitization and foreclosure norms will pave the way for the creation of an active secondary mortgage market, enhance the liquidity into the sector at low cost and speed up the loan recovery mechanism thereby increasing the pool of lendable resources.

Further, Indian housing finance industry mainly caters to the organized or the employed sector and traditionally confined to metros and other big cities. Industry has to go a long way to cover vast populace of semi urban and rural towns that live outside the formal sector. High cost of land, higher interest rates and outdated legislation on urban land had all deterred the growth of this sector in the past. With several of this hurdles been tackled in the present India, things are beginning to look brighter for housing finance companies. By and large, with the overall demand for housing on an upswing, the housing finance industry continues to benefit.

Some of the factors which may, however, impede growth are rising interest rates, and regulatory issues, which include high stamp duty, removal of tax sops and increased risk weights of home loans.

KEY ISSUES
The key issues in the housing finance sector are:

Building an inclusive housing finance system: Housing finance providers have continued to focus on middle to higher income groups with the lower income groups, self employed, rural population by and large excluded. Therefore increasing attention will need to be paid to the needs of the unnerved and underserved. The challenge is to leverage housing for equitable economic growth and poverty reduction.

Innovation and Product Development: With the expansion of the market and entry of new classes of borrowers, the need for innovation through development of new products, adaptation of existing products, developing new delivery mechanisms and channels cannot be over emphasised. For the same the standardization of business, underwriting processes, documentation is imperative and would encourage specialization in industry along with benefiting the individuals at large and addressing the regulatory concerns.

Market Infrastructure: The rapid growth of the housing sector has left the market infrastructure lagging behind. In developed economies, housing stocks and mortgages are leading indicators of economic activity and are widely tracked. In India, housing data is scattered resulting in insufficient analytical work which is a constraint in public policy formulation. Building a detailed data base covering housing and housing finance at a disaggregated level is both urgent and important.

Other issues: In the context of the apparent potential for housing finance in the country, the issues of affordability, new and customized products, delivery channels, policy interventions and their sequencing assume relevance.

CONCLUSION:
The age old concept of a house as a shelter has transformed with time to mean a popular investment for a significant segment of the population who consider this as a good source of return on capital. In the past few years, the housing finance industry has also been experiencing, in some measure, the process of integration with the capital market through the securitization route. This integration has established functional links between savers, home loan borrowers, financiers and capital market investors. This market has huge growth potential to serve as an important funding source for the housing sector and it should be possible to realize this in the coming years. Furthermore, hybrid loan option is well on its way to make a foray in India. But despite all this, the ratio of property loan to Indian GDP is slightly more than 3% which is too low compared to developed countries where it is in the 30-40% range ( in the US, it is nearly 50%). And this triggers the hope, that the scope of further deepening of this financial segment is too segment and given the trends of past five years, there is no reason to doubt as why this would not happen in India

BIBLIOGRAPHY AND REFERENCES:

WEBSITES:

www.nhb.com www.hdfc.com Personal Website of R. Kannan

REASEARCH REPORTS:

Trends and progress in the Housing Finance sector in India by National Housing Bank. Building up India: Outlook for Indias real estate markets by Deutsche Bank Research. Annual Report 2005-06 of Dewan Housing Finance Corporation Limited. Annual Reports 2005-06 of National Housing Bank.