Little has been heard so far about the progress of the corpus created to provide last-mile funding for housing projects.
The real estate market is all but in a shambles. RERA has meant tougher rules for builders, and buying with black money is no longer easy. The signs are bad, getting worse; demand remains anaemic, there is huge over-supply, prices are elevated and out of reach of most buyers, a good many builders are over-leveraged and going bankrupt, lenders are over-stretched and vulnerable to loan losses, and stalled projects aren’t moving.
If the government doesn’t fix it, the economy will slip further. Remember, private consumption now contributes a whopping 60% to GDP, but is slowing sharply, threatening to grow at a lowly 5.8% this year, the lowest pace seen in seven years. The only way to drive consumption is to push real estate.
Today, banks and other lenders are highly exposed not just to builders but also to individuals; industry borrowings at the end of March 2019 were Rs 4 lakh crore. The bad news is that the well-run companies, many listed, account for less than 20% of this. The total housing credit outstanding in September 2019 was Rs 20.2 lakh crore, of which banks had a 65% share. If the economic environment worsens, some of this could go bad.
It is foolish to be consoled by the falling inventories, which were down to 1.27 billion sq ft at the end of October 2019, from 1.47 billion sq ft in October, 2018; that happened mainly because there were fewer launches. The fact is inventories are very high, which means cash flows are choked. Given how very few jobs are being created and how fast consumer confidence is ebbing, it will take several years to liquidate the outstanding inventory. Even that is an optimistic outlook.
A glance at PNB Housing’s results for Q3FY20 tells us why. The lender’s loan book contracted 2.2% year-on-year (y-o-y) while disbursals collapsed 66% y-o-y—the bigger fall was in the developer segment—but the fall in the retail space, too, was a fairly steep 58% y-o-y. Some of this was due to liquidity constraints, some due to a cautious stance, and some because demand was weak. The lender appears to have chosen to curtail disbursals to developers, and this can’t be good if the progress of projects is impacted. The risk aversion to home loans for under-construction properties—arising from a sense that builder stress is rising—is very worrying. Already, the non-performing loans (NPLs) for the lender spiked 1.75% for Q3 due to slippages in the books for both individuals and companies.
Not everyone is in such bad shape, but most of the smaller mortgages are not in good shape. An analysis by ICRA showed NPLs could rise to 2-2.2%, over the medium term, from 1.9% currently. The loan against property (LAP) segment—where borrowers are mainly self-employed persons in the unorganised sector—is a particularly weak spot and is hurting the asset quality of home finance players at a time when loan growth is slowing, and could slow further. The concern is that the loan-to-value ratios are, in many cases, imprudent, and that the value of the collateral—property—could fall.
The better players, like HDFC, have seen loan books grow at a very modest pace over the last couple of years; in Q3FY20, loan growth to individuals was an ordinary 16% y-o-y. Worse, disbursements in the nine months to December 2019 were up just 13% y-o-y, way below the levels of 15-23% y-o-y during H1FY18-FY19. That is how sluggish the sector is, and much of the momentum is coming from the affordable sector. The non-retail segment saw a 6% y-o-y increase, higher than the run-rate observed over the past few quarters, but the lender is clearly not keen to add exposure to builder community.
The government needs to act now. Little has been heard so far about the progress of the corpus created to provide last-mile funding for housing projects. That money needs to be spent fast because some 1,600 projects—roughly five lakh units—are stalled; throw out the promoters, and hand over the project to a reputed builder and help him with working capital to complete it.
A higher exemption limit for the principal on home loans—to around Rs 3 lakh (outside of Section 80C) from the current Rs 1.5 lakh per annum coupled with a bigger break for the interest component on home loans at, say, Rs 3 lakh from the current Rs 2 lakh—could well persuade those sitting on the fence to buy a house. It might even tempt those with one house to buy a second one. This is better than giving a general tax exemption.
Those that argue affordability is improving are scoring a technical point. For individuals in a certain income bracket, it could be true. But, prices across India increased 3% y-o-y to Rs 5,880 per sq ft in October 2019 from Rs 5,700 per sq ft in October 2018. The reality is, a home is still out of the reach of the vast majority; the only way to resolve this is to get builders to drop prices while allowing more FSI, of course, making sure there is infrastructure support. If the government wants to tackle the consumption collapse, it needs to, if you will, get real.