Here are a few factors which, if leveraged by the home loan market, can help strategize for wider real estate market opportunities.
Businesses and markets around the world have been struck a mighty blow by the pandemic which has triggered a critical economic crisis. The Indian real estate sector landscape, which was already marred by factors like the liquidity crunch, regulatory and procedural reforms, took a further beating with the abrupt appearance of the COVID-19 virus on its horizon.
However, experts have predicted the growth of the Indian home loan market at CAGR of approximately 22% amidst this gloomy scenario which has been the silver lining in the dark cloud. The main key drivers pushing the home loan market in India include salaried/ business class, low home loan interest rates, lucrative schemes from developers, monetary measures, and policy and regulatory support provided by the government.
Here are a few factors which in my view, if leveraged by the home loan market, can help strategize for wider real estate market opportunities:
1. Ease of documentation in banks: Banks are the preferred partners for home loans due to the attractive interest rates provided by them and the marginal cost of the funds-based lending rate (MCLR) model which is followed by them. However, at present, there is a lot of documentation that is required to be filled in by buyers applying for home loans, leading to delays. Reducing the number of documents can help in encouraging prospective buyers to apply for home loans.
2. Lowering interest rates: Although India has one of the lowest interest rates amongst the developing nations, a huge chunk of its population classified under the middle-income group can use a further reduction in rates. This target segment can benefit from further reduced interest rates leading to an upward trajectory in demand with a lower cost of credit to the home buyer. This will translate into a possible gain in the movement of residential inventory, especially in light of the upcoming festive period in the country.
3. Consideration of the current predicament of prospective buyers: The COVID -19 outbreak might have given rise to the ‘new normal’, but its sudden entrance within the national borders had led to complete disruption of markets and businesses. The reason was the lockdown enforced by the government to control its spread. The step brought the economy to a standstill and caused devastation across sectors which left many without jobs or with salary cuts. The home loan segment should demonstrate empathy by designing processes and introducing measures that can motivate prospective buyers to apply for loans even in this dismal scenario.
4. Longer loan terms with lower EMIs: A longer loan term automatically means a lower EMI. This step can push demand in the realty sector by building momentum in the consumption cycle as it will entice end-users to invest in buying homes. Additionally, an option should be provided to include a no-penalty clause if the buyer in the future decides to pay up the amount or reduce the tenure. This will give comfort to buyers that if their situation improves, they can restructure their loans accordingly.
5. Compulsory home insurance with loss of income riders: A key step that I would suggest and also the need of the hour in the present context is to encourage new/existing buyers to buy home insurance. This should include loss of income to protect the interests of the buyer in this fragile state of the economy. The banks should tie up with insurance companies to come up with such plans.
6. Focus on Tier 2 & Tier 3 cities where the average unit is lower: In the current scenario, most employees are working from home or have moved back to their native places which are mainly Tier 2 & Tier 3 cities. This has led to the diaspora being more widespread, allowing realtors and banks to develop projects in these cities/towns. The home loan market should focus on the expansion of IT & ITES in Tier 1 & Tier 2 cities which can act as an added advantage to further its cause. In residential, the price per unit on average is lower in comparison to the cost of an average unit in Tier. Hence the loan amount is lower in these cities and can help the home loan market make a wider outreach.
7. Interest on only net outstanding amount lying in the savings with the same bank: Flexi home loans are considered to be an innovation in the home loan segment. Many major banks offer loans with flexibility on the interest payable. This is beneficial for buyers who have under construction property, with payments being linked to the stage of construction. The instalments in this case are comparatively smaller and can be paid in lesser amounts. Opting for a flexi loan means one can save on the interest outflow by withdrawing funds only to the extent required.
8. Contractual savings on home: This is a loan-linked form of saving. The scheme enables the build-up of equity by offering the home loan borrower with the possibility of a low-interest loan. It fosters the supply of long-term funding and the capacity of lenders to lower credit risk. Contractual savings enhance the breach between very long-term mortgage loans and very short-term deposit liabilities.
(By Nimish Gupta, Managing Director, RICS South Asia)