The Housing Opportunity in India

It’s a well-established fact in modern economics that homeownership is a big driver of economic activity. Homeownership is directly correlated to several factors including, but not limited to purchasing power or affordability, employment, availability of mortgages, interest rates on mortgages, physical and social infrastructure, taxation and property rights etc.

Housing in major Indian cities has traditionally been unaffordable for the average middle-class buyer. In the past, housing demand was concentrated in city centers due to limited physical infrastructure that resulted in long commute times from peripheral areas. Social infrastructure such as schools and hospitals were limited in both quantity and quality and as a result, those who chose to live in peripheral areas had a much lower quality of life than their peers who lived inside cities.

The trifecta of dysfunctional capital markets, illicit cash in the economy and high interest rates on mortgages played their role in making housing further inaccessible and unaffordable for the average buyer. Dysfunctional capital markets resulted in concentration of capital and a tendency among homebuilders with access to capital to hoard land. This was further accentuated by illicit cash in the economy which fueled purchases of land as a store of value. High headline inflation of between 4% to 6% resulted in high nominal mortgage rates of between 8% and 10% for mortgages that extended for a maximum duration of 15 years. This made it difficult for an average home buyer to make monthly mortgage payments for homes with the needed standard of living.

The entire housing and real estate industry in India was therefore an overleveraged, capital appreciation game where lenders, developers, wealthy buyers and so-called investors were all in a nexus of convenience to the detriment and exclusion of the average homebuyer. It is no wonder then, that according to a KPMG-NAREDCO study, India has an urban housing shortage of 18 million units while tens of thousands of completed homes remain unsold in major Indian cities.

The scenario has changed materially in India in the past few years. Urban infrastructure, though far below what would be desirable, has improved steadily with the construction of metro rail systems, rapid bus transit systems, bypass roads, ring-roads and in-city overpasses. Significant investments have been made in expansion of water, sewage and waste management infrastructure. Social infrastructure like schools and hospitals has improved in both quality and quantity. As a result, the quality of life in peripheral areas of cities has improved.

The curbing of illicit cash in the economy has had a deflationary impact on the real estate sector. Land as a store of value has been steadily losing sheen and capital allocated to the real estate sector has been moving to productive and yield generating assets like offices, warehouses and housing. This has upset the erstwhile capital appreciation business model of real estate developers. Equity in a real estate project is less valuable than before and only marginally more remunerative than high cost debt. This has disincentivized overleveraging by developers. Real Estate development is gradually becoming a volume throughput game. Developers who can efficiently utilize capital and deliver value are able to scale rapidly with external capital (equity and debt) and in the process are able to earn high returns on their own capital.

The government’s thrust on housing for all through the PMAY scheme has been a game changer for homeownership. Under this scheme, housing loans under LIG (Low income group), for homes below 650 sq. ft. in size and for loans below USD 8,700 in value, receive a 6.5% interest subsidy per year. Housing loans under MIG-1 (Middle income group), for homes below 1,725 sq. ft. in size and for loans below USD 13,000 in value, receive a 4.0% interest subsidy per year. Housing loans under MIG-2, for homes below 2,150 sq. ft. in size and for loans below USD 17,400 in value, receive a 3.0% interest subsidy per year. With unsubsidized mortgage rates on 15-year loans at 8.5%, the interest subsidy under the PMAY scheme has had a catalytic impact on housing demand.

The Real Estate Regulation Act (RERA), the Goods & Services Tax (GST) and the Insolvency & Bankruptcy Code (IBC) have empowered home buyers of under-construction properties and have caused weaker developers to close shop. This has expanded the market opportunity for strong and scrupulous developers. With reforms in place and a reset from the sins of the past, housing is likely to be a big driver of economic growth in India and it presents a large opportunity for allocators of capital looking to invest in India.

Comments (2) -

  • Govind

    5/26/2019 2:52:39 PM | Reply

    Not just the housing opportunity, but the building material opportunity . Think cement , panels , pipes , paints

  • Add Hunters

    8/28/2019 8:59:47 AM | Reply

    Hey! Yes, you! You’ve always noticed how time flies so fast and this year is going to end again, however, not realizing that you are still burning your money in paying your high-cost apartment. Good thing if you have your own home, but what if you don’t? While enjoying life at your young age, why not start investing your hard earned money to a more significant thing like <a href="";> real estate property</a>