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2024 could see a rise in affordable housing due to lower interest rates

According to bankers, the growth in financing for affordable housing in 2024 will probably be driven by lower interest rates. Lending rates may start to decline in the middle of next year, according to remarks made by State Bank of India Chairperson Dinesh Khara last week.

“Given the expectation of a rate cut by mid-year and a robust GDP growth forecast, the outlook for 2024 looks promising. Tier-2/3 cities and rural markets will drive growth in affordable housing finance”, according to Ravi Subramanian, managing director and CEO of Shriram Housing Finance.

Experts claim that despite the rise in interest rates and prices following the pandemic, home buyers in the affordable home segment have not fully recovered from the disruptions to their income. Consequently, there have been indications of early-stage delinquencies on affordable housing loans.

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“The early-stage delinquency in the affordable housing can be on predictable lines looking at the unique business model. Since this sector promises healthy growth and income, it would remain a focus area for housing finance companies,” says Sarosh Amaria, managing director, Tata Capital Housing Finance.

According to experts, a 100 basis point increase in interest rates generally results in a 6.1-6.4% increase in the EMI for home loans. The EMI increases by about 5.3% for a borrower who can afford affordable housing. Since the RBI raised interest rates, EMIs have increased 14.4% on average.

According to a Knight Frank India release, although improvements were made in 2023, the EMI-to-income ratio in both tier 1 and tier 2 cities remains below pre-COVID-19 levels. It further stated that households in these cities must spend, on average, between 21 and 51 percent of their income to cover the monthly payment of a housing loan for a unit.

The supply of affordable housing and new developments have slowed down recently because of the high cost of materials and land. Additionally, the strong demand in the mid-income range is discouraging builders from considering projects involving affordable housing, particularly in metropolitan areas.

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According to data from Knight Frank India, as of September 2023, 31% of all sales were affordable homes, or those priced under Rs 50 lakh. This represents a decrease from 39% of sales one year prior. Comparably, as of September, the segment accounted for 24% of new launches, down from 33% in the previous year.

Amaria believes that stronger credit growth, better operating conditions, and economic momentum will all contribute to asset quality and profitability in the years to come.

In 2023, a number of lenders increased their attention to the affordable housing market in an attempt to profit from the industry’s promising future. As of September 30, for example, PNB Housing Finance had 200 branches in the affordable segment, up from 151 the previous year.

Separately, Axis Bank and Shriram Housing Finance declared their strategic alliance via the Yubi platform, utilizing the co-lending model.

“The housing industry will experience sustained growth momentum in 2024 when factors like rising disposable incomes and a growing trend towards home ownership are combined,” stated Sandeep Menon, managing director and chief executive officer of Vastu Housing Finance. He also mentioned that non-banking financial companies and housing finance companies are well-positioned to open up new opportunities for sustainable growth in 2024.

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Similarly, SMFG Grihashakti observes that given the sizeable underserved market, favorable demographic profile, housing scarcity, and government encouragement from the government’s “Housing for All” mission, the long-term growth outlook for affordable housing finance remains favorable. Furthermore, improvements in technology and strong asset quality will contribute to an 18–20% increase in the affordable housing finance segment this fiscal year.

Conversely, important monitorables include the macroeconomic climate, clear political decisions, stable commodity and fuel prices, consumer inflation, and geopolitical threats.

“Despite these risks, optimism prevails in the housing sector due to the government’s strategic focus on driving secured asset growth, evident from the recent RBI circular and the government’s commitment to doubling the growth of this sector,” Manish Jaiswal, managing director and chief executive officer of Grihum Housing Finance.

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