Year Ahead- Lower interest rates may buoy affordable housing in 2024

Year Ahead: Lower interest rates may buoy affordable housing in 2024

Lower interest rates will likely drive the growth in affordable housing finance in 2024, say bankers. Last week, State Bank of India Chairperson, Dinesh Khara said that lending rates may fall from middle of next year.

“The 2024 outlook appears bright in the backdrop of rate cut hopes — probably happening by mid-year — and a strong GDP growth forecast. Affordable housing finance growth will come from tier-2/3 cities and rural markets,” says Ravi Subramanian, managing director and chief executive officer, Shriram Housing Finance.

“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.

Experts said that a 100 bps increase in interest rate leads to borrowers’ home loan equated monthly installment(EMI) rising 6.1-6.4% in general. For an affordable housing borrower, the EMI rises by around 5.3%. On an average, EMIs have risen 14.4% following RBI’s rate hikes.

A release by Knight Frank India shows that while EMI-to-income ratio across tier 1 and tier 2 cities improved in 2023, it is still below pre-COVID-19 levels. It also said that on an average, households across these cities need to spend 21-51% of their income to fund the EMI of a housing loan for a unit.

In recent years, affordable housing supply and new launches have witnessed a slowdown due to high land cost and high material cost. Also, the robust demand in the mid-income segment is acting as a deterrent for builders to look at affordable housing projects, especially in metros.

Affordable homes, which are priced at below Rs 50 lakh constitute 31% of total sales as of September 2023, lower than 39% a year ago, data from Knight Frank India showed. Similarly, the segment comprised 24% of new launches as of September, lower than 33% a year ago.

Amaria feels that in the coming years, improved operating conditions and economic momentum, as well as robust credit growth, will support asset quality and profitability.

In 2023, many lenders strengthened their focus on the affordable housing segment with an aim to capitalise on the strong outlook for the segment. For instance, PNB Housing Finance increased its branches in the affordable segment to 200 as on September 30 from 151 a year ago.

Separately, Axis Bank and Shriram Housing Finance, announced a strategic partnership under the co-lending model through the Yubi platform.

“The second half of 2024 hints at a potential reversal in the interest rate cycle, which, when combined with factors like rising disposable incomes, a rising trend towards home ownership, will ensure sustained growth momentum for the housing industry,” Sandeep Menon, managing director and chief executive officer, Vastu Housing Finance said, adding that housing finance companies and non-banking financial companies are poised to unlock new avenues for sustainable growth in 2024.

Similarly, SMFG Grihashakti notes that the long term growth outlook for affordable housing finance remains favourable, given the large under-served market, favourable demographic profile, housing shortage and government impetus from the government’s “Housing for All” mission. Additionally, technological advancements and robust asset quality will help lead to an 18-20% growth in affordable housing finance segment in the current financial year.

On the other hand, macroeconomic environment, decisive political outcomes, stable fuel and commodity prices, consumer inflation, and geopolitical risks are key monitorables.

“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.