Notwithstanding some prevailing challenges, the housing finance market, driven by robust residential realty, rapid urbanisation, demographic shifts and connectivity boost to tier 2-3 cities with massive infrastructure development, is poised to experience exponential growth over the next 5 years.

Vinod Behl

That the housing finance market is in good health is evident from the recent report of National Housing Bank (NHB) which shows individual housing loans (IHL) at INR 33.53 trillion as of September 2024, clocking 14% growth compared to the previous year. Housing loan disbursements during the half-year ended September 30, 2024 were at INR 4.1 trillion while full-year disbursements for 2023-24 stood at INR 9.07 trillion. Riding high on key government schemes like Pradhan Mantri Awas Yojana(PMAY) -Urban & Gramin , Affordable Rental Housing Scheme, Urban Infrastructure Development Fund , the NHB Residex showed a YoY increase of  6.8% for the quarter ending September 2024, up from 4.9 percent for the previous year.

Housing Finance in Healthy Mode

According to NHB, out of the total individual housing loan outstanding of INR 3353668 crore, the share of housing finance companies (HFCs) stood at INR 625813 crore. The maximum outstanding of INR 271893 crore was in MIG segment, followed by INR 178251 crore in LIG segment, INR 108524 crore in HIG segment and INR 67144 crore in EWS segment.The public sector banks had an outstanding of  INR 1470341 crore while private sector banks had an outstanding of INR 3353668 crore. The cumulative individual housing loan disbursement in H1 FY 25 stood at INR 410416 crore.

The buoyant residential market that saw absolute growth of 74% between 2019 and 2024, has been a major driver of housing finance. As per CareEdge Ratings, between FY 21 and FY 24, banks registered a compound annual growth rate of 17 percent in the housing loan space against 12% growth by housing finance companies.   During this period, banks dominated the housing loan market with a share of 74.5% as of March 31 2024. This was made possible due to cost of fund advantage, co-lending and greater reach of banks. The HFCs on the other hand clocked a stable market share of 19% as of March 31, 2024.

Housing Finance Trends

With the premiumisation of residential real estate, the housing finance market has seen a trend of gradual rise in the proportion of AUM with ticket sizes ranging between INR 30 lakh and INR 50 lakh. On the other hand, there is a decline in proportion of AUM for less than INR 30 lakh ticket size. As far as housing finance companies are concerned, ticket sizes are not growing at the same rate as that for residential property launches, meaning thereby that the demand for higher ticket size  loans is likely being met by the banks  and partly through self-funding by home buyers.

Another significant trend that marks housing finance, is that the Middle-Income Group (MIG) accounts for 44% of housing finance outstanding. The share of EWS (Economically weaker Section) and Low-Income Group (LIG) stood at 39% while HIG (High Income Group) had a share of 17% as of September 30, 2024.

Challenges

It’s not all hunky dory with the housing finance industry. It faces a few challenges as well. A major challenge pertains to regional disparity, with South and West India dominating the market while East India badly lags behind. Over a dozen states (14 in number) including Uttar Pradesh, Karnataka, Gujarat, Maharashtra, Tamil Nadu, Telangana, Andhra Pradesh, Kerala, West Bengal, Madhya Pradesh, Delhi, Rajasthan, Punjab and Haryana account for roughly 91% of the individual housing finance market in terms of IHL outstanding.

According to available statistics, Southern, Western and Northern states respectively account for about 35%, 30% and 29% of cumulative disbursements during H1 FY 25. On the other hand, the share of Eastern states including North Eastern states was abysmally low at about 6%.

As per NHB, another significant challenge pertains to the limited number of institutions offering green building certifications and the lack of uniformity among rating certifications issued by different agencies. Moreover, the higher cost of green construction materials is also a challenge.

Road Ahead

Notwithstanding these challenges, the future outlook for the housing finance sector is quite promising on account of continuous rise in residential real estate demand driven by high ticket housing across metros and Tier 2 cities, massive infrastructure development boost by the Centre amidst rapid urbanization, digitalisation and sustainability.

The 2025 budget boost to disposable income with a steep rise in individual income tax limit, provision for construction of 3 crore additional homes (including 2 crores rural and 1 crore urban homes) and reintroduction of home loan interest subsidy under Credit Linked Subsidy Scheme (CLSS) of Pradhan Mantri Awas Yojana (PMAY) will bolster housing, in turn giving a further push to housing finance. Advancements in financing models, improved regulatory mechanisms leading to greater transparency , will help lay a high growth path for the housing finance sector in the coming years.