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The real estate sector in India consists of four key components: housing, retail, hospitality, and commercial real estate. Among these, the housing sector has been the most significant. Over the past four decades, the housing sector has gained considerable importance in India, driven by rising incomes and changes in the country’s economic and social structure. As a result, the demand for housing has surged. Alongside this, demand for retail and hospitality sectors has also increased. The commercial real estate sector gained prominence following the liberalization of India’s economy in 1991.

The Status of the Real Estate Sector in India

The real estate sector shows promise, with a projected compound annual growth rate (CAGR) of 9.2% from 2023 to 2028, fueled by urbanization, the growing rental market, and rising property prices. There has been a surge in private investment within this sector, and the government has permitted 100% Foreign Direct Investment (FDI) for township and settlement development projects. Foreign investors are investing around $3.1 billion annually in Indian real estate, with a 37% year-on-year increase. A significant boost for the sector has come from the PM Awas Yojana Urban 2.0, which aims to address housing needs for 1 crore urban poor and middle-class families with an investment of Rs. 10 lakh crore. Currently, there is a high demand for higher-budget housing (priced above Rs.1 crore), while demand for affordable housing (under Rs. 50 lakh) has declined compared to previous years.

Factors Driving the Real Estate Market

Several factors influence the real estate market:

Demographics: Factors such as age, income, migration patterns, and population growth have a large impact on real estate growth.

Interest Rates: The interest rate plays a crucial role in determining the cost of loans for purchasing real estate. Lower interest rates make home loans more affordable, thus increasing the number of buyers.

Economic Health: Economic indicators like GDP growth, employment opportunities, production activity, and inflation affect the real estate market significantly.

Government Policy: Policies aimed at providing housing for the poor and middle class, such as tax credits, loan repayment deductions, and subsidies, help boost housing demand and stimulate the real estate market.

Addressing the High Cost of Housing in India

Despite various affordable housing schemes launched by successive governments, a large portion of India’s population still lacks access to decent housing. In a study by scholars Shishir Gupta, Nandini Agnihotri, and Annie George (Economic and Political Weekly, 14th September 2024), the authors explain why housing remains expensive in India and why the growth of house prices has been tepid over the past seven to eight years. They point out that the price-to-income ratio in India stands at 11, more than double the affordability benchmark of 5. The high cost of housing can be attributed to structural issues within the real estate sector, such as inefficiencies in land use planning, a semi-transparent real estate market, and the prevalence of a shadow economy. These issues, coupled with a less competitive industry structure, contribute to high prices.

To make housing more affordable, the authors suggest focusing on the transparent release of developable land through better land use planning and implementation. If the government addresses these weaknesses, it is expected that India will be able to create a more transparent and resilient housing market, which could help solve the country’s housing problems.

Home Loans: The Largest Component of Retail Loans in Banks 

According to a report by the Economic Times (16th December), home loans make up the largest portion of retail loans disbursed by Indian banks. Retail loans include home loans, consumer durable loans, vehicle loans, credit card outstanding balances, and unsecured loans. The share of home loans in the banking sector has grown significantly, from 18% in 2013-14 to 31% in 2023-24. Home loans account for 47% of all retail loans, with higher home sales and prices contributing to this surge. Delhi and Maharashtra have remained the top two states for retail loans over the past decade, with Gujarat recently replacing Tamil Nadu as the third-largest state for retail loans.

The government is introducing a new scheme for home loans targeting low- and middle-income groups. This zero-collateral housing loan scheme will offer loans up to Rs 20 lakh with minimal documentation or third-party guarantees. The loan tenure will extend up to 30 years, which is expected to further stimulate the real estate sector’s growth.

In conclusion, the Indian real estate sector is poised for growth, but to achieve its potential, policy reforms addressing structural issues and making housing more affordable are essential. With continued investment, government initiatives, and reforms, the sector is expected to continue its upward trajectory in the coming years.