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Revealed
India's Third Giant Leap

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Housing demand here to stay
Wed, 17 Oct Pre-Open

Housing loans as a proportion of GDP in India are at a low of 8% while in China it comes in ahead of 20%. In developed countries across the world, this ratio is closer to 70-80% and the market is close to saturation. Thus there is a huge potential for growth in this segment which will benefit players such as HDFC, LIC Housing, Dewan Housing and a number of commercial banks. But, are high interest rates, courtesy the Reserve Bank of India (RBI)'s aggressive liquidity policy holding back from demand for new homes.

Well, according to Mr. Keki Mistry, the MD of HDFC, this is not the case. He believes that for the Indian middle class interest rates do not matter as much as affordability of housing. Another factor that helps determine growth is demographics. India is a very young country where 60% of population is less than 30 years. People think of buying a house on loan when they are in their mid-thirties. Affordability is 4-5x of their annual income. But, not every address or region is created alike. Let's take the financial capital Mumbai for example. A prime property in the swanky South Mumbai area could cost Rs 1 lakh per square foot (sq ft) while in the distant suburb of Vihar the rate could be Rs 3,000 per sq ft. Thus within the Mumbai metropolitan area there isn't much demand, but the Navi Mumbai and Kalyan area is seeing traction.

The biggest question for home buyers is whether the real estate market is in for a correction. Well, while there is some correction possible in a few pockets of metro cities, overall demand is here to stay. However, infrastructure and transport facilities in and between cities need improvement for the demand to catch up elsewhere.

Builders are also having a tough time and have seen a tight squeeze in funding. Since the Lehman Brothers collapse and the financial crisis in 2008, things were really bad for builders. However, things have improved somewhat now. In 2011 there were a number of builders going for IPOs including Oberoi Realty and Prestige Estates, as they were building a large land bank and were going in for high-end apartments. However, the focus has now shifted to affordable housing, albeit partially. With better pricing, India's favourable demographics and low penetration we believe that growth in housing industry will continue to see good traction over the long term.

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