Housing Finance Industry…

India’s housing finance industry comprises of banks and housing finance companies. They have contributed to new residential home loans at a compounded annual growth rate (CAGR) of more than 30% percent during the period 2002-2007. This has been due to the combined effect of a booming economy and low interest rates. Further, steady prices and continuation of tax concessions to self-occupied residential home borrowers are contributors to the growth of the industry. The average age of borrowers has declined over the years, while the number of double-income households has grown significantly enabling them to borrow higher loan amount due to higher repaying capacity.  

The scenario of unprecedented growth in housing finance, driven by low interest rates, increasing purchasing power and attraction of the yield in this sector has begun to show signs of change last year. There has been a decrease in demand during the last one year. Earlier to that i.e., during 2006 to 2007 home prices increased at a CAGR of 30 to 40 percent against a 20 percent increment in salaries witnessed in metros and larger cities. This had affected the buyer’s affordability. 

As the borrowing cost for banks and housing finance companies steadily increased in line with rising interest rates in the economy in the past two years upto Q3 of 2008-09, banks and housing finance companies resorted to hike in interest rates so as to maintain their interest spreads. Interest rates on new home loan originations have increased significantly by 200 basis points during April ‘2008 to September – October ’2008.  As a result a higher proportion of monthly income was being paid out as home loan equated monthly instalments (EMI). The combined effect of an increase in property prices and interest rates has meant that home loan buyers, who would have had to borrow less at an interest rate of 8.75 percent a year ago, now have to borrow more to buy the same property due to higher property prices at higher interest rates of 10.5 to 11 percent.  This trend has resulted in both lower affordability i.e., an average home at a higher multiple of annual income, and higher debt burden (meaning that a larger proportion of income gets spent as home loan EMI).  Further, the increase in interest rates on fresh loans to 10.5 to 11 percent from 8.75 percent meant increase in debt burden i.e., higher instalment to income ratio.   Alongwith, the economic down turn and consequential apprehensions of job insecurity and income reduction led to slump in the market.

However, the scenario has taken the reverse turn in the last quarter of the financial year 2008-09, which was evident from the higher booking of flats, and sharp increase in the disbursements.  Real estate developers have taken sensible decision in reducing or slashing rates in major centres specially Mumbai, Thane, Navi Mumbai, Delhi NCR and Bangalore to encash on the existing demand in the real estate market.  The good deals might be offered for a few weeks or for the first ten properties or for a killer deal for a time-bound two days or similar schemes but yes, the writing is clear on the wall that the willingness to connect with the "real" pricing has dawned on the developers to sell at reduced prices to encourage more and more sales.

The sales teams in the builder/ developer offices are at their all-time creative best with sales tactics. They now understand clearly that with buyers unwilling to relent on unrealistic pricing, there is an even greater need to price competitively, maybe with a lower profit margin, than holding on to the price and project as the interest meter runs. These proactive steps should ensure renewed demands and increased volumes during the current year.

On the softening of interest rates and pressure on PSU banks to cut the interest rates…

First on softening of interest rates, it can be said that interest rate is just one of the factors affecting the industry. Property prices, transparency, hassle-free services and customer affordability are equally important. The customer would not arrive at a decision solely based on the cut in home loan rates for one year.  Judicious customers would and should consider the differential in interest rates over the entire term of the loan rather than the lower interest rate applicable in the first year and examine as to what extent the fall in the interest rates has been passed on the existing customers.  This apart, a builder / developer should look at the affordability of the borrower and accordingly should do pricing of the property in order to encash on demand. Now, when the property prices have shown 15% to 20% or in some places upto 30% reduction, the builder have realized that in order to stimulate the demand for housing, they need to re-price the property prices by way of reduction in prices for limited period or offer attractive deals like 0 percent rise in floor rise of the flat etc. or altogether re-draw the project model to match the demand profile.

On the second aspect with regard to PSBs embarking on rate cut, the general impression is that the PSU banks are a little reluctant to give hassle-free loans at lower rates as a very few PSU banks have in fact, registered substantial increase in disbursements. And when there is a perception that risks are higher, banks would be forced to charge a premium. It is nice to have a good life, low interest rate, but it is not always possible to live that way.    

On raising of funds …

The funds have never been a serious issue for us. We had ample liquidity even in tough market conditions. Moreover, with the measures announced by the government to stimulate the economy in general and housing in particular, funds may not be an issue for the present.  And recently there was an item in the media, indicating that SEBI would make raising of funds easier and faster. SEBI is re-working on the norms for instruments such qualified institutional placements (QIPs), initial public offers (IPOs) and rights issues to enable companies to raise capital quickly, mitigating the risks arising out of sudden changes in market sentiment.  

On the performance of the Company …

In the turbulent times when Housing sector was passing through rough patch, LIC Housing Finance largely could manage the environment well, inspite of various global as well as domestic economic challenges and was successful in producing good business growth by its inherent strength in meeting difficult challenges through unceasing and untiring efforts. The Company has not only ensured  consolidation of the gains achieved in the past years, but also ensured further growth and increased profitability. The year 2008-09 has been a year of further containment of defaults and NPA levels when compared to previous years.

Looking ahead …

It is estimated that the housing finance industry will be able to maintain a higher growth in fresh origination of residential home loans over next three to five years mainly due to increased affordability of the borrower i.e. ratio of average property price to average annual income, on account of the falling loan interest rates and decrease in property prices. The average age of borrowers has declined over the years, while the number of double-income households has grown significantly thereby enabling them to borrow higher loan quantum due to increased affordability and repayment capacity.

The growth drivers will continue to increase demand for self-occupied residential housing.  Revival of economy will certainly lead to a steady increase in monthly incomes across key sectors.  Rising proportion of double income households, renewed confidence in higher income generation, reassurance of job security and availability of variety of financing options should stimulate growth of the housing sector. All these factors will further boost the impact of increased affordability, leading to the sector’s steady and comfortable growth.

Looking forward, LIC Housing Finance would like to remain focused in end-user segment for growth and increased profitability and wish to make the coming year, a year of further consolidation and progress by crossing greater milestones.

R. R. Nair

Director & Chief Executive