Affordable housing in India is not sub-prime

Thanks to a variety of witty presentations explaining financial woes afflicting the US via e-mails, everyone today is an “expert” on sub-prime;everyone is risk-averse and everyone who is not affluent is seen as “high risk” and deemed by most as “sub-prime.”

But, there are fundamental differences, both in the economic situation and the customer segment that constituted “sub-prime” in the US and the segment that needs affordable housing in India.

In US, the housing market was booming and moving only one way — up. With easy and plenty of cheap money available, lenders were increasingly tempted to offer home loans to persons with poor and tarnished credit histories.

They could charge these customers higher interest rates and fees than they would have been able to charge other consumers. Given the rising prices of property, a tidy profit was in store anyway. The idea became popular and large numbers of loans were made to customers who were likely to have problems servicing regular loans even at low rates. While the sun shone, everyone was happy. Then, things changed.

These customers had no way of meeting their repayments and started defaulting on the loans, which led to foreclosures and home sales. As the numbers snowballed, property prices also gave way. Creatively-packaged debt, that was sold as good credit risk, started turning bad. The crisis had begun.

The Indian scenario is not really comparable. True, we’ve had a real estate boom too; but that boom has been limited to the middle and upper income residential and the commercial property market. If we were to use the standard banking benchmark of home loan entitlements being equal to 3.5 times annual salary, this effectively means that over 80% of the Indian population that earns less than Rs 11,000 per month cannot even dream of owning a house, since there has been no supply at all.

The segment earning between Rs 7,000-Rs 15,000 has never been considered significant for home loan offerings. While the prospects of getting a home loan for the formal sector employee do exist, chances for informal sector employees and the self-employed like drivers, NGO staff, small caterers and others are bleak. This is despite the fact that they have marketable skills, steady jobs/incomes and employer/customer recommendations.

These people have the capability and willingness to make a 20%-25% down payment on houses costing between Rs 4 lakh-5 lakh and are happy and able to take on a 15-year loan obligation, at market rates, in order to realize their dream home. Given that in these small-sized homes, the land cost represents a small percentage of the overall cost, the speculative risk is low, with a very low probability of a drop in these property prices.

Thus, labeling the entire segment as sub-prime would be a misnomer. The higher- and middle-income market has already been tapped and it may now be a good time to take a fresh look at the lower middle class. It could represent a new horizon for growth, diversification and de-risking. Some rough arithmetic suggests that the housing market for the Rs 7,000-Rs 15,000 segment translates into a market size of over Rs 5,00,000 crore!

And then there is the huge multiplier benefit — a strong growth in this market will yield a positive spin-off effect on employment generation (the residential housing sector hires a relatively high percentage of low-skilled daily wage workers as opposed to infrastructure projects) and uptake in consumption of commodities, including cement and steel. Needless to add, lives of millions of Indians and our urban landscapes will be transformed.

The handful of niche players that currently service this customer group, are clearly not enough. The question is will the financial sector rise to the challenge and develop this market quickly enough. The real estate players are already sniffing at the opportunity and a positive signal from banks may be just the trigger they need to take off. And, therefore, ironically, the housing segment which was the cause of all ills in the US may just be the answer to all our problems in India.