The home loan market has been on a high growth trajectory over the past decade. It has increased from annual disbursements of Rs 20,000 crore in 2000 to Rs Rs 1.7 lac croretoday. This is poised to double to over Rs Rs 3 lac crore) by 2015.
The views of those on the lookout for a property, has however altered over the last nine months. The giddy price rise that characterized the real estate markets in the middle of 2010 has now given way to some moderation. Further, over the past year and a half the RBI has increased the policy rates 11 times. Consequently, the home loan rates for prime borrowers have increased from 8.25% in early 2010 to 11% now. This has implications on the demand for home loans as well as the portfolio management strategies of Housing Finance Companies, as follows.
Impact on Demand
There have been two factors that have made the purchase of property more expensive. Firstly, prices have increased significantly since the last correction in 2008, even doubling in some places. Secondly, the increase in interest rate mentioned above has lowered the loan amount that the borrower can avail of by 17%. The combined effect of these factors has caused prospective home buyers to pause and take stock of their changed situation. The decision making cycle has got elongated and demand has got deferred.
However, the demand for home will continue to be robust in the long term, despite some short term undulations. This is because buying a house is a ‘stage of life’ decision, determined by individual customer events and circumstances, rather than extant prices or interest rates.
Also, there is a shortfall of 2.5 million dwelling units in urban India. With the population in urban India slated to increase from 28% of the country’s population now to 40% in 2030, this shortfall is only projected to increase.
Some banks/Housing Financing companies are using the current environment to aggressively acquire customers who can transfer their loans from other entities. Such a Balance Transfer program benefits both the customer who will save on the relatively high interest rate on his loan as well as the acquirer who will get a customer with a proven repayment track record.
Loan providers as well as the agencies that represent them have begun to actively educate customers about the value in leveraging their properties for a loan. This has seen an increase in Home Equity loans over the past six months. This has substituted the lower home loan disbursals in some markets like Mumbai.
Housing Finance Companies
The rapid rise in interest rates would impact existing loans in one of two ways – either the loan installment goes up or the tenure of the loan increases, with the installment constant. For some borrowers the increase in installment could prove too high. This could cause him to tip over and default. This is especially true of borrowers with low incomes, given the inflation in food and various other household products.
Thus, higher interest rates could precipitate defaults in hitherto good borrowers.
Prepayments of home loans tend to be higher when interest rates are high. Some borrowers with surplus cash will choose to prepay their loans to minimize their interest outgo. Banks and other diversified financial companies can provide other avenues to customers which will offer comparable interest rates so that the amount earmarked for prepayment is invested elsewhere.
Margins are normally lower in a rising interest regime and higher when interest rates are falling. This is because the cost of funds tends to correct quicker than the portfolio interest rate. Also, since most borrowings for Housing Finance is long term, the current high borrowing rates impose long term costs on the business.
In summary, home loans are long term assets and managing the interest rate cycle is central to the business model. The lower end of the interest rate cycle provides more options to manoeuvre. However, the strategies adopted by lenders to deal with the variables listed above will separate the more profitable players from the rest.
(The author is Head, Retail Finance, Edelweiss Group and CEO of Edelweiss Housing Finance Limited)