Real estate outlook 2024: Is affordable housing finance ready for takeoff?

Source: Livemint

The prevailing high-interest rates since May 2022 have had a minor impact on the affordable housing demand in India. The affordable housing segment, by virtue of being in the smaller ticket segment, is relatively less rate-sensitive than the mid and luxury segments. 

Rate hikes of 250 bps in a short period of less than a year have had some impact on the consumer's psyche and we did see some degree of postponement in purchase when the cycle was underway. However, post stability after the series of hikes, the last 3-4 months have again witnessed an uptick in demand.

Decline in affordable housing demand and market trends

At a closer look, the relative drop in the affordable housing demand in the recent past is more or less an urban phenomenon. The decline is seen particularly in metro cities. An urge for upward mobility is a prominent characteristic of urban consumers. Most often, those who can afford to buy a house in the affordable segment with less reliance on loans will look for an upgrade to the mid-segment even at the cost of high leverage. So, those who remain in the low-income group will have no cushion to absorb interest rate shocks.

Within the affordable housing segment, we are witnessing different trends in urban vs semi-urban segments. On the urban side, high land costs and rising material costs make the affordable housing segment unattractive for realtors. Consequently, the share of affordable homes in the overall residential realty market is shrinking rapidly. 

Shift in real estate dynamics

According to property consultant Anarock’s latest report, real estate developers are now launching a lesser number of affordable housing units and more mid and luxury-segment projects. The data reveal that the share of affordable homes in the total new supply during Q2FY24 fell to 18% in seven major cities and in 2018, it was 42%. In the total launches too, the share of affordable homes has been falling steadily since 2018. Notably, the urban labour market has not witnessed a boom post-pandemic and it was another major blow to the affordable segment.

According to the Periodic Labour Force Survey Annual Report 2022-2023, the worker population ratio (WPR) in urban areas registered only a marginal increase from 43.9% in 2017-18 to 47.7% in 2022-23. At the same time, in rural areas, it increased from 48.1% to 59.4% during the period.

However, affordable home loan demand from tier-2 and tier-3 cities and rural markets continues to remain robust. More often, the consumer demand in these geographies is for land purchase and self-construction of houses. Hence, the companies focussed on these geographies continue to witness a reasonable demand uptick in the finance requirement from consumers.

Outlook for affordable housing

The indication from the RBI is that though there are upside risks to the food inflation outlook, the long pause in the rate hike cycle is here to stay for a comparatively longer period, with retail inflation hovering around the central bank’s tolerance limit of 4%. Apart from lower interest rates, other major factors influencing the affordable housing market are broad-based economic development and job growth.

With government policies now supporting economic activities beyond the top 10-12 cities, we expect that the demand for housing from semi-urban and rural India will continue to witness strong growth.

The anticipated GDP growth this full fiscal year is 7%. For the first three quarters of the next fiscal year (FY25), the GDP growth rates are estimated to be 6.7%, 6.5%, and 6.4%, sequentially. It lends credence to the industry’s confidence that the momentum on home loans will continue in the next 12-18 months, which will also spur demand for the affordable segment.

The New Year 2024 outlook appears bright in the backdrop of rate cut hopes -- probably happening by mid-year -- and a strong GDP growth outlook. So far, FY24 has been a strong year for financial services as consumer demand has been robust. With high home sales and booming construction activities across tier-2 and 3 cities and rural India, the demand for home loans, including affordable housing loans, is expected to jump in FY25. Stellar GDP growth, overall buoyancy in the market, and the stability in RBI’s policy rates are contributing to this optimism.