Friday, September 14, 2007

India’s Home Loan GDP Ratio 5%, versus 50% In US & UK

Despite real estate witnessing boom in last couple of years with 90% of home loans borrowers being the first timers, home loans GDP ratio in India continues to be at meager 5% as against 50% in US and UK and therefore suggested that it be more than doubled in budget proposals for 2008-09.

Above observations are made in a Paper on Reality Check brought out by The Associated Chambers of Commerce and Industry of India (ASSOCHAM), pointing out that since buying a home requires huge investment, especially for first time buyers, higher home loan GDP ratio is necessary as 90% of borrowers are the first time borrowers.

As such, high interest rates coupled with soaring property prices have only impacted the affordability of buyers, demand, however continues to persist and will become stronger and more intense in near future.
The ASSOCHAM President, Mr. Venugopal N. Dhoot said that at present, India has a housing shortage of about 19.4 million units of which 6.7 million is estimated for urban India and those of 12.7 million units in rural India. However, with rising income, swelling middle class and rapid urbanisation, the demand is set to shoot up and is estimated that additional 45 million units would be required for both rural and urban areas by 2012.

As a result of rising income and swelling middle class, India’s per capita income has doubled over the past 20 years. With population growth of about 1.6% per annum and Gross Domestic Product (GDP), growth of 9% per annum, the per capita income is expected to quadruple by the year 2020.

The average real income of urban India and rural India is likely to grow by 5.7% and 3.6% respectively by 2025. Moreover, India’s middle class is expected to expand by more than 10 times from its current size of 50 million to 583 million people in next 18 years.

Therefore, all these estimates work out to make a strong case for higher home loan GDP ratio so that India and its population is able to keep a pace for meeting the demand for housing units, pointed out Mr. Dhoot.

Commenting on impact of rising home loan rates, the ASSOCHAM Paper says that home loan rates have shot up from 7% in 2003 to 12% in 2007 with its impact massively following across the board including genuine buyers, speculators, real estate developers and bankers.

A case in example is that as the home loan rates have gone up sharply, the interest pay out on housing loans has amplified as a borrower of Rs.10 lakh with loan tenure of 20 years has to shell out an extra of Rs.3250 every month on his EMI. The annual additional burden comes out to be as high as 39,000. Loans up to Rs.20 lakh form 80% of total housing loan portfolio, says Mr. Dhoot.

The Paper also points out that share of housing loans in total personal loans have been on its way up since 2000-01. It has increased from 37.2% in 2001-02 to 48.6% in 2004-05. Home loans constituted 52.7% in the total household credit in the year ended March 2006, marginally up from 52.5% in the previous year. Housing together with agriculture accounted for more than two-third of incremental priority sector lending in 2005-06.

Home loans formed 11% of the total outstanding credit of scheduled commercial banks in March 2005 up from just 2.4% in May 1990. The sales value of housing construction has witnessed an exceptional leap from Rs.17.61 crore in 1991 to Rs.4,182.67 crore in the year 2006. Lower interest rate regime has played a pivotal role in the progress.

However, with the repricing of interest rates in the last four years from 7% to 12% and the sky rocketing prices of the property, there has been a slowdown in the residential property market. The phenomenon signifies suppression of demand rather than absence. Though it is necessary to check the flow of speculative money it needs to be appreciated that augmenting the land supply for development would go a long way in easing the demand pressure on prices.

Credits: IRNews

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