India mortgage lending to double in next 5 years

In the Indian financial markets, if there is one man who is virtually synonymous with the home finance business, it is Deepak Parekh. In fact, he was also the pioneer of home finance in India. So when Deepak Parekh talks about the potential of housing in India and its ability to drive future growth, you do listen attentively. According to Parekh, India should be able to double its home loans to around $600 billion in the next 5 years. In rupee terms, that translates into a housing loan book of approximately Rs.46.6 trillion.

There is a larger context in which Deepak Parekh has made this remark. India’s $5 trillion GDP dream was interrupted by the COVID and its aftermath. Now, the Indian economy looks poised to grow from GDP of around $3 trillion to $5 trillion over the next five years.

If there is one sector that would be a direct reflection of that massive GDP growth, it would be housing. Parekh expects the housing boom in India over the next five years to coincide with the book in the Indian economy as it traverses to become $5 trillion in size.

There is another argument that Parekh provides. According to Parekh, the current mortgage market size is $300 billion, which is around 11% of GDP, the normal benchmark for Asian economies is closer to 30%.

Even if we assume that the mortgage market doubles from the current level to $600 billion, on the enhanced GDP it would still be just around 12-13% of the GDP. That means, even after the frenetic growth over the next five years, the Indian mortgage to GDP ratio would still be woefully short of the Asian median levels.
 

On the enhanced GDP over the next 10 years, even if the mortgage to GDP ratio was to improve to around 18-20%, the impact on housing demand would be exponential. It must also be noted that housing demand has strong externalities.

It is a direct reflector of the rising standard of living of people. At the same time it is also a force multiplier in that it leads to surge in demand for cement, steel and a host of other infrastructure related sectors which can have a salutary impact on the GDP. It would be about aspiring to have a home.

Parekh has made an interesting point here. He says that mortgage lending in India is largely commoditized and a game of managing cost of funds, yields and NPAs. That could change in the years to come as Fintechs combine with mortgage originators and builders to offer more customized and ready-made solution for home loan customers.

As products get more customized to the income patterns, cash flow cycles and the unique needs of people, the demand for housing automatically goes up. All these could contribute to a housing boom.

It may sound rather trite or hackneyed to repeat, but the fact of the matter is that India continues to be a domestically driven economy and chunk of India’s growth will continue to be powered by domestic consumption.

That is what puts the Indian mortgage market in a sweet spot. Parekh also made an important point that the optimal structure for a housing finance outfit is to sync it with a bank. That is also partially an explanation for why HDFC Ltd is merging into HDFC Bank at this juncture. It will be a larger pool and lower costs.
India saw a massive housing boom in the early 2000s which lasted all the way up to the global financial crisis.

However, post the crisis, the housing market has never been the same. The retail appetite was grossly missing which also led to huge inventories of unsold properties. Parekh believes that the coming growth story in housing would be much bigger than anything seen till date. That should be music to the ears and also a good growth trigger.