Through the looking glass: Housing needs a stronger mortgage market

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Published: October 18, 2019 4:17:46 AM

A house is not merely a place to live and build a life, it is also one of the most significant assets of the family. An investment in a house roots a family to a location, giving them a significant stake in the development of the local area.

looking glass, Housing, stronger mortgage market, mortgage market, roti, kapda, makaan, housing in indiaThe development of housing is a function of the economic reality of a location and its era. India has seen, and will continue to see, significant urbanisation.

Housing is a fundamental requirement of human existence. The requirement of shelter is so basic that in common parlance in India, it is clubbed together with food and clothing as the troika of basic human needs of roti, kapda, and makaan. It is no wonder that housing is a key social demand, and a priority area for governments, both at the Centre and the states.

Housing as a socio-economic construct
The development of housing is a function of the economic reality of a location and its era. India has seen, and will continue to see, significant urbanisation. Where people choose to live is a complex optimisation of how close houses are to their places of economic activity (work, business catchment area, etc), how conveniently it is located (from schools, hospitals, common public areas like gardens, etc), and how cheaply and effectively it is connected with various other parts of the city.

Housing is intricately linked with urban planning, and public transportation. A well-designed city, with low cost and high speed of intra-city transportation, will have dispersed and more formal housing, which keeps prices low. A not-so-well-connected city will see dense clusters of housing—many of which may be informal, “illegal”, or “slums”. Any discussion on housing is, hence, a wider discussion on the economic development of a city, and the country.

A house is not merely a place to live and build a life, it is also one of the most significant assets of the family. An investment in a house roots a family to a location, giving them a significant stake in the development of the local area. If the house also happens to be an appreciating asset, it creates its own wealth effect, allowing families to stretch themselves somewhat in times of need, or to increase consumption. In this role of housing, there is a natural trade-off for policymakers to think about: should housing supply remain constrained relative to demand so that there is a natural scope of appreciation, or is the public good better served by continuously reducing the costs of making a house so that more and more people can aspire to formal housing?

Is housing a public or a private good?
A point that requires conceptual clarity and political consensus is whether housing is a public good or a private one. Housing is a basic human necessity, and good housing creates strong linkages with the local society. However, beyond the basic aspect of shelter, housing increasingly starts to become a private good, with significant investment by families and individuals in shaping their houses according to their specific usage and needs. The political consensus on this topic is relevant because the economic lens through which a public and a private good is viewed are very different. In case housing is seen as a public good, tight low-rental laws, or high supply of government-constructed flats are tools to keep in check the overall prices of houses. In case housing is viewed as a private good, there are incentives for asset-owners to preserve and grow the value of their assets.

Across most societies, there is a thin, sometimes undefined, line between economic segments of society where housing moves from being a public good to a private one: it is important to keep policies meant for one segment from impacting the viability of the other.

Mortgage securitisation
Development of a housing mortgage market is the conversion of a physical unit of infrastructure into a bundle of economic rights and liabilities that are reasonably standardised. The standardisation of economic agreements and legal architecture can lead to the creation of a tradable market in such rights and liabilities. The rights in a property can create significant economic value—such rights allow various players like lenders, tenants, service providers, etc, to take an economic interest in a property.

Standardised loan covenants can allow pooling, sharing, and diversification of risks by allowing investors to assess the risks and returns of bringing together different types of borrowers in a portfolio. Converting a basic human need into tradable economic contracts leads to significant gains from financialisation: costs of ownership can be reduced and purchasing ability increased as lenders have comfort in financing home-equity owners.

Regulatory support can help in the creation and development of this market. Harsh Vardhan Committee formed by the Reserve Bank of India (RBI) to improve mortgage-backed securitisation recommended the formation of a new government-sponsored intermediary through the National Housing Bank (NHB) specifically for housing finance companies. The committee has suggested formation of an intermediary company, with an initial capital of Rs 500 crore, in which the government will hold 51% stake, which will gradually be brought down to 26% over five years. The intermediary would be allowed to invest in the pool it securitises.
Shareholding in, or association with such an intermediary can offer originating entities (banks, and housing finance companies) the ability to shape the standardisation of the mortgage contracts, servicing agreements, legal recourses, etc. Especially, in times of stress in the underlying housing market or within the financing entities, such a market can help transfer assets and risks to hands that are more capable of taking them on. A well-functioning housing and its finance market is a fundamental requirement of an economy.

Author of ‘The Making of India’. Views are personal

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