The Indian home mortgage finance market is on the cusp of a remarkable growth trajectory, projected to expand at a robust 13 per cent Compound Annual Growth Rate (CAGR) over FY23-26. This expansion is driven by rising incomes, enhanced affordability and substantial government support. As the industry continues to evolve and expand, it is poised to play a vital role in meeting the housing needs of millions of individuals and contributing to the overall growth and development of the nation. As a result, the forthcoming quarters are expected to yield positive outcomes for both Housing Finance Companies (HFCs) and Non-Banking Financial Companies (NBFCs).

Emerging trends and market segmentation

Broadly, India’s real estate market can be categorised into super-prime, prime, emerging markets, and the affordable segment, each presenting promising investment avenues year-round. Delving into the past few years, particularly post-October 2020, reveals a consistently robust performance, punctuated by occasional seasonal dips.

Amidst the prevailing conditions, mortgage loans have surfaced as a highly preferred and convenient financing choice. These loans are secured by leveraging residential and commercial properties as collateral, thus magnifying their appeal. Beyond property acquisitions, mortgage loans cater to a spectrum of needs, including home renovations and addressing business ventures, medical emergencies, higher education aspirations, and diverse financial requirements.

Untapped potential and government initiatives

Despite the encouraging trajectory, it’s important to acknowledge that the mortgage penetration rate in India remains modest at 11 per cent. This rate is even lower in rural and semi-urban areas, languishing under 5 per cent. This disparity highlights the vast untapped potential in these regions. While India’s housing loan penetration slightly surpasses the global average of 10 per cent, the scope for growth remains pronounced, particularly in rural and semi-urban territories.

The affordable housing segment stands out as one of the swiftest-growing domains in Indian consumer finance. Typically addressing consumers in the lower to middle-income brackets (specified by certain eligibility and pricing criteria), this segment will play a key role in the overall development of the housing sector due to its manifold benefits and far-reaching impacts. The industry has advanced thanks to government initiatives like the Pradhan Mantri Awas Yojana (PMAY), which provide incentives and subsidies to developers and purchasers alike.

The interim Budget 2024

As per the latest Interim Budget, the government intends to launch a scheme to help the middle class living in rented houses, slums, or chawls and unauthorised colonies to buy or build their own houses. This will not only give a boost to the real estate sector but also support the growth of housing finance companies by pushing the demand for affordable housing. The emphasis on social housing for Economically Weaker Sections (EWS) and Low Income Group (LIG) segments will push home buying and accelerate both supply and demand for affordable houses. We are also optimistic that the government will focus on this sector in detail in the July session of the Budget.

Having said that, there are several promising signs. The announcement of the new housing scheme for the middle class will boost both demand and supply of residential units, while the infrastructure upgrade will fuel growth in Tier 2 and Tier 3 cities. The government will also construct additional 2 crore homes under the PMAY Grameen scheme, which will augment the sentiments for ancillary industries, especially for housing finance companies who have been a key driver of credit to these industries. Moreover, the efforts to empower women and youth to foster sustained growth and development in the country will supplement these initiatives and align with the overall objective of “Viksit Bharat”.

The allocation for the government’s signature mission, the Pradhan Mantri Awas Yojana (PMAY), has been increased by 49 per cent to ₹80,671 crore. The allocation for PMAY Grameen has been increased from ₹32,000 crore last year to ₹54,500 crore, while the allocation for PMAY (Urban) has been increased from INR 22,103 crore to INR 26,170 crore. The 11.1 per cent increase in capital expenditure is expected to have a ripple effect across sectors including property development.

Changing dynamics and growth prospects

Shifts in buyer demographics are noteworthy, evident from the decrease in the average age of homebuyers, from 38 years to 25 years now. This trend signifies the entry of younger individuals into the housing market, potentially influenced by urbanisation, rising disposable incomes, and appealing institutional incentives. Not only the demographics, but even the seasonality of housing purchase has changed in the last few years. Home buying, which was once considered a festive or seasonal purchase, is now an all-year-round phenomenon, with consumers becoming more flexible and creating their own milestones rather than waiting for an external stimulus.

The digitisation of the real estate sector assumes a pivotal role in facilitating heightened mortgage penetration and home finance demand. It streamlines customer acquisition, enhances the efficiency of loan servicing, simplifies the application processes and improves access to financing solutions, thereby bolstering the overall demand for housing units.

It’s also interesting to note the increased use of advanced technology solutions in the home buying process. The use of AI powered tools, virtual tours, property inspection services and more have allowed real estate developers and property dealers to renew the conventional methods of home purchase and enhance customer experience. While this digital transformation is a welcome move, it amplifies cybersecurity concerns and the need for ensuring the safety of consumer data. The onus of mitigating such risks and delivering a secure customer experience will lie with the government, realtors, cybersecurity experts and even homebuyers.

Future outlook

The convergence of these multiple dynamics paints a promising outlook for India’s housing market in the forthcoming years. The anticipated real estate boom will drive growth across allied industries such as manufacturing, construction, transport, finance, technology and others, which will lead to higher focus on infrastructure growth and increase in housing finance. This will have a cyclical effect in enhancing the disposable income across population segments, which in turn, will fuel higher demand for housing.

Recent interventions by the RBI such as modifying norms for housing financing companies, adopting an Early Warning Signals (EWS) framework to prevent frauds, increasing governance and responsible practices, etc. highlight its consumer-centric approach. This evolving situation will positively impact the housing finance industry by compelling organisations to offer differentiated services in a more transparent manner, thus increasing consumer confidence.

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