The Covid-19 impact on housing finance

No one knows when the coronavirus crisis will end. Nations are scurrying to find ways to contain the spread and find a cure as economists and policy makers try to assess damage from the pandemic, whose impact on the world’s economy is said to be worse than that of the 2008 global recession.

It is tough to assess the magnitude of the impact of the coronavirus outbreak now. In India, even if the outbreak is contained within 15-20 days after the lockdown, the next two quarters are going to be hard for the economy: Experts estimate GDP growth to shrink by 1-1.50 percentages in the next two quarters. In such times it is good to adopt a cautious attitude.

In India, one of the sectors most affected by the outbreak and the consequent lockdown is real estate and housing finance. Before we look at the impact of the crisis on the sector, let’s see how the sector had been doing before the pandemic.

The slowdown in real estate and housing finance began after the IL&FS crisis in September. The liquidity crunch in housing finance companies and non-banking financial companies (NBFCs) impacted construction activities. Things improved a notch after the government and the central bank intervened. Yet, housing finance did not pick up as expected due to low demand as the economy slowed post the FY20 Budget. There is a huge unsold housing inventory piled up over the past four years in nine major cities worth ₹6 lakh crore, according to the online realty portal Prop Tiger.

The government took a slew of measures to revive the economy and the real estate sector by setting AIF (Alternate Investment Fund) of ₹25,000 crore to provide last-mile funding to about 1,600 stalled projects at different stages, increasing Income tax exemption on housing loans of ₹ 2.5 lakh to ₹ 3.50 lakh for affordable housing, and many other measures to boost supply and demand.

Whatever visible uptick the measures had brought about has been wiped out by the coronavirus pandemic. All sectors of the economy are badly hit with immediate high impact on domestic service sectors such as tourism, aviation, hospitality, auto/taxi, small business, retail, food and beverages, etc.

The government of India has taken adequate steps to contain the spread of the virus. It has also announced immediate support for farmers, construction workers and migrant labourers—most impacted by the lockdown and the economic standstill.

Even if the lockdown is lifted after April 14, it will take considerable time for the economy to get back to near normal. There is bound to be massive unemployment going forward. The government is likely to announce another package for various sectors despite its tight fiscal position but there is no other way out.

The financial sector will be the most hit due to problems in the real estate sector. Non-performing assets are set to rise, liquidity will be adversely hit. The Reserve Bank Of India (RBI) has taken unprecedented steps, proposing to infuse ₹ 3.74 lakh crore liquidity through a cash-reserve-ratio cut of 1%, targeted long-term repo auction, marginal liquidity facility, a deep repo rate cut of 75 bps and more importantly allowing a three-month moratorium on all-term loans and working capital. This will provide a breather to all those borrowers whose cash flow got impacted due to Covid-19. Banks, financial institutions, and HFCs/NBFCs will be able to defer non-performing assets recognition.

Housing sector growth will be heavily impacted and is not likely to revive till the economy shows any sign of improvement. Stress in housing loan, particularly in affordable housing, will rise. Companies which have large exposures to small businesses and informal segments will see little higher stress for a few months due to a fall in demand and the weakened ability to repay. However, many small businesses serve the common man, hence have more resilience to revive soon as the situation gets normal. It also depends on how fast workers who have gone back to their villages return to work. Overall, housing growth in 2021 will be like the year 2020 and much depends on coordinated steps by the government and the RBI. The repo rate cut of 75 bps has made home loans from banks much cheaper.

Property rates are also expected to be cut by developers by 10%-15%, hence the demand for housing by organised sector employees for houses of ₹ 25 lakh to ₹ 75 lakh is expected to revive soon after the lockdown ends. However, low-income affordable housing demand (below ₹15 lakh) will take a little more time and will depend much on government support. In my view, people who opt for this housing segment will find it difficult to manage their own contribution which has now become more difficult. This can be sorted out if the government tweaks the existing process for the release of applicable credit linked subsidy of ₹2.67 lakh to identified beneficiaries through lenders before loan disbursement. This tweaking will revive affordable housing growth as envisaged in Housing for All by 2022.

The author is managing director and CEO, Aadhar Housing Finance.