The Reserve Bank of India (RBI) recently increased the home loan limits for priority sector lending.
Up until now home loans "to individuals up to Rs 28 lakh in metropolitan centres (with population of ten lakh and above) and Rs 20 lakh in other centres, are eligible to be classified under priority sector, provided that the cost of dwelling unit does not exceed Rs 35 lakh and Rs 25 lakh, respectively."
As per the new definition, the home loan "limits for eligibility under priority sector lending will be revised to Rs 35 lakh in metropolitan centres (with population of ten lakh and above), and Rs 25 lakh in other centres, provided the overall cost of the dwelling unit in the metropolitan centre and at other centres does not exceed Rs 45 lakh and Rs 30 lakh, respectively."
The question is why has this been done? Let's take a look at the growth in total outstanding priority sector home loans, year on year. Take a look at Figure 1.
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Figure 1 clearly tells us that the growth of total outstanding priority sector home loans has slowed down dramatically in 2017-2018. It was at just 1.97%. In 2017-2018, only a total of Rs 7,243 crore of priority sector home loans were given out. In comparison, in 2013-2014, Rs 34,800 crore worth of priority sector home loans were given out. There has been a massive fall since then.
In fact, the proportion of priority sector home loans in overall home loans outstanding has been coming down over the years. Take a look at Figure 2.
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Priority sector home loans as a proportion of total home loans outstanding has fallen from a high of 72.4% in 2009-2010 to around 38.5% in 2017-2018.
Now let's take a look at what pace the total outstanding non-priority home loans, have been growing. Take a look at Figure 3.
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Comparing Figure 3 with Figure 1, it is clear that non-priority sector home loans have been growing at a much faster pace than the priority sector loans. Further, in absolute terms the total amount of non-priority home loans being given out year on year, are much more than the priority sector home loans.
Let's take the case of 2017-2018. As mentioned earlier, priority sector home loans worth Rs 7,243 were given out. In comparison, non-priority sector home loans worth a total of Rs 1,07,236 crore, were given out during the year. In 2016-2017, the loan numbers stood at Rs 26,068 crore and Rs 87,238 crore, respectively. This marked difference, has only gone up over the years.
What this tells you is that the current definition of priority sector home loan lending had become irrelevant over the years, with a greater part of the lending being carried out in the non-priority category. And that explains why RBI changed the definition of priority sector lending.
Now a home loan given against a home, which is worth as much as Rs 45 lakh, in a metropolitan city, will be categorised as lending to the priority sector. This definition itself tells us how grave India's housing crisis is. How many Indians, even those living in metropolitan cities, can afford a home which costs Rs 40-45 lakh?
Someone at the Reserve Bank of India(RBI) has a wicked sense of black humour. This rejigging of the definition is the RBI's way of telling us that real estate in India is only for the rich.
Now let's look at a few more points.
As we like to say whenever we analyse anything to do with real estate in India, it is very difficult to say things with full certainty, given the lack of institutional data.
So, what do the home loan numbers we have discussed above actually tell us?
1) Have home prices fallen? This is a question that everyone wants a clear answer for. But given the lack of agglomerated data put out by a credible agency, this has always been a difficult question to answer.
Nevertheless, given that the non-priority home loans continue to grow, it is safe to say that on the whole across the country home prices really haven't come down. Of course, they may have fallen in parts of the country, like the National Capital Territory. Otherwise, home prices continue to remain high.
Also, this does not mean that home prices are rising, like they did between 2002 and 2011. At some level they have stagnated. (We can come to this conclusion from the fact that non-priority home loans are not growing at the same pace as they were a few years back).
2) Another possible explanation here can be that people have been buying bigger homes now than in the past. And this explains why the non-priority home loans have gone up, over the years. But applying Occam's Razor, i.e., the simplest explanation is the right one, we go back to the original point of prices having not fallen.
3) The total amount of home loans being given out in the priority-category has been falling over the years. It has come to a stage now where the RBI has had to change the definition itself. This tells you very clearly, there is nothing like genuine affordable housing in India. While builders can pass of homes worth Rs 50-60 lakh as affordable housing, but that is not genuine affordable housing. Even the RBI now thinks houses worth Rs 45 lakh are affordable housing, given that lending against such homes will now be categorised lending to the priority sector.
4) If the non-priority home loans continue to grow, how do you explain the fact that builders are stuck with a large amount of inventory or the fact that new launches have come down? This is the simplest question to answer, among the ones that we have raised here.
As we have explained in the past, prospective home buyers now want to buy homes which are ready to move in. People want to avoid under-construction projects. That is for sure.
Further, other than builder inventory, there is also the individual inventory of real estate investors who have bought homes over the years and have been sitting on it. They are a little more flexible on the price front than builders sitting on inventory.
Hence, home loans have continued to grow, despite builders continuing to sit on a huge amount of inventory.
Long story short-India's real estate continues to cater to the rich. Not much has changed on that front.
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