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Housing - A cornerstone for economic growth - Views on News from Equitymaster
 
 
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  • Nov 11, 2000

    Housing - A cornerstone for economic growth

    A spurt in housing activity generally reflects the health of the economy. A spurt in the economy invigorates the housing sector activity. Today, for India to achieve balanced economic growth, it is essential to boost construction activity in the housing sector.

    The outlook for the housing finance sector seems very exciting, going by the recent concessions given to the sector by the government in Union Budget 2000. The government has further repealed the ULCRA (Urban Land Ceiling and Regulation) Act, which was perceived to be a stumbling block for housing growth by the builders. Added to this the government has announced an action plan to construct 10 million houses every year. This will give a fillip to the sector. This push to housing will help India achieve a higher GDP growth.

    The other encouraging factors are that the real estate prices have dipped to their lowest in several years, making investment in real estate very economical at the moment. Secondly, houses for the middle-income group have become more affordable in the last five years. Earlier, houses would cost on an average 20 years of salary, which has now come down to just 8-10 years' salary. Also interest rates for housing loans have declined from an average 17-18% in 1994 to 12-13% now, thereby making the loans cheaper.

    In the recent years, housing has also become more affordable due to increasing urbanisation and higher consumer incomes. Interestingly there are an increasing proportion of younger people buying homes today. Housing finance companies (HFC) are setting up wide networks that operate efficiently throughout the country, providing finance at all levels of incomes. What will boost growth further are the value added services provided by these companies. HFCs today have diversified their role and help in identifying property according to individual requirements. It also assist in completing legal due diligence of the same.

    But there are certain factors, which could slow down the growth. One of them is the hike in interest rates. Since individuals are increasingly becoming rate sensitive, rising interest rates could dampen sentiment. Further, development in the housing sector depends on industrial revival, spurt in infrastructural activity and a positive trend in the core sectors like cement, aluminium and automobiles. The economy downturn in India resulted in a slow down in the construction activity. This led to a chain reaction wherein many core sector industries including cement, steel, aluminium etcetera were badly affected. The most recent concern however has been a slowdown in demand for commodities like cement, in the states hit by drought. Although, the growth phase has started for these core sectors, it will take some time for activity to gather momentum.

    Housing shortage continues
    (million units) FY71 FY81 FY91 FY01E
    Rural 11.6 16.3 14.7 12.8
    Urban 3.0 7.0 8.2 6.6
    Total 14.6 23.3 22.9 19.4
    Source: NHB

    While infrastructure status given to the housing finance companies will pave the way for large housing projects in future, the government has not yet allowed foreign direct investment (FDI) to housing sector. The housing shortage in India is widening and domestic investors are facing a cash crunch. So it is only the foreign investors who can bring in the much-required money. The sector has now been recognized as an important engine of economic growth. The potential for the industry to grow is thus immense as can be seen in the survey conducted by National Housing Bank (NHB), which indicates that the housing shortage over the last two decades has largely been unmet. Monetary benefits as well as fiscal concessions given by the government in the past have to some extent reduced the total housing shortage in India.

    The housing finance industry is on solid ground and has interesting prospects. However, the industry has become over crowded, with players of all sizes. The entry of banks into the sector has further intensified competition. Only companies that have a strong brand image, large distribution network and a customer friendly approach stand to benefit in future.

    Performance of HFCs
    Particulars FY98 FY99 FY00 1HFY01
    Growth in income 15.1% 17.0% 14.2% 21.4%
    Growth in net profits 16.6% 3.4% 17.1% 17.9%
    % change compared to corresponding previous period

     

     

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