• FEBRUARY 8, 2003

Housing Finance : Industry in transition

If one were to study the sector-wise performance over the last five years, the housing finance industry has outperformed everyone’s expectations. Loan disbursals have grown at a CAGR of over 35% in the last five years. But the industry is still fragmented with a large number of players spread across different parts of the country. There are nearly 383 HFCs or housing finance companies in the country currently. This is apart from the numerous banks that have entered in to the fray. In this article we look at the nature of this industry, its trends, the major players involved and the prospects of the industry going forward.

The housing finance industry is estimated to be worth nearly Rs 330 bn (FY02) and is estimated to have grown by nearly 28% compared to FY01. Healthy growth in this industry has been mainly due to a consistent decline in interest rates, tax incentives given by the government and changing income profile of the Indian middleclass population. A huge deficit of nearly 40 m (FY02E) dwelling units is likely to ensure that the robust growth rates in this sector will continue in the future.

Source: LICHF

Before going any further, a brief view at the level of fragmentation in the industry is of significance. The graph above gives us the breakup of market share based on outstanding housing loans as on March 31, 2002. The split up pie of the market share indicates that HDFC is still the market leader followed by SBI. But in terms of the housing loan assets, LIC Housing Finance limited (LICHF) occupies second spot next to HDFC. What is significant is the fact that banks have stepped in to the domain of these HFCs and are capturing market share of the incremental loans disbursed.

Currently, banks have garnered close to 35% share of the housing finance market by offering competitive rates of interest. Among banks, SBI and ICICI Bank have been the most aggressive as far as loan disbursals are concerned. We expect the trend to continue with banks gaining a larger share in incremental loan disbursals.

Performance of HFCs
Growth in income15.1%17.0%14.2%21.4%
Growth in net profits16.6%3.4%17.1%17.9%
Source: NHB % change compared to corresponding previous period

The housing finance industry boom has been due to a host of factors. Real estate prices have dipped to the lowest in several years, making investment in real estate very economical at the moment. 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.

Fall in interest rates has changed the way the salaried class view housing loans. Interest rates for housing loans have declined from an average 17-18% in 1994 to 10%-11% now, thereby making loans cheaper. Changing demographics of the Indian populace has also played an important role in the development of this industry. The emergence of a new class of families called DINK or ‘double income no kids’ has played its part. In the recent years, housing has also become more affordable due to increasing urbanisation and higher consumer incomes. Income tax incentives have also played a major role in stimulating housing demand. Interest expense to the tune of Rs 150,000 per annum is exempt from taxes.

Prospects of the housing finance industry look encouraging mainly due to the fact that the gap in demand and supply has not been corrected adequately. At the end of the ninth five-year plan period i.e. FY02, the shortfall in dwelling units was in the region of 40 m. In terms of dwelling units the Urban Affairs and Employment Ministry has stated that cumulatively India will have to add a minimum of 6.5 m houses per year to add 33 m houses in order to bridge the current gap. At present the supply of houses stands at close to 2.5 m per year. Apart from that the Indian economy may have reached a stage where interest rates may continue to remain soft over the long-term. This is likely to ensure a steady demand for housing loans.

Housing shortage continues
(million units)FY71FY81FY91FY01E
Rural 11.616.314.712.8
Source: NHB

Infrastructure status given to the housing finance companies will pave the way for large housing projects in future. The sector has now been recognized as an important engine for 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.

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.

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