The delay in rolling out the guidelines for the implementation of the home loan interest subsidy scheme for affordable housing under Pradhan Mantri Awas Yojana (PMAY) 2.0, has cast its shadow over the home loan demand during the festive quarter (October-December 2024).
In the backdrop of discontinuation of interest subsidy scheme under PMAY , the housing finance companies were banking on the reintroduction of the schemes with revised guidelines , to push home loan disbursals during the festive months. Especially as in the absence of the scheme and in view of the rising home prices and high interest rates, there has been a dip in the housing loan demand.
According to the report, ‘How India Lends Fy24, home loan market has been facing slowdown, with growth decelerating to 7.9% YoY by the end of FY 24, a drop from 23% in FY23. There has been muted growth in fresh home loan disbursals, with loan disbursements seeing 50% dip (9.2%) in FY24 against 18.2% in FY23.
The interest subsidy scheme under PMAY 2.0 was extended till December 2024. Under EWS and LIG category, the prescribed subsidy is up to 6.5% on a maximum loan of Rs 6 lakh. For the MIG segment, the interest subsidy is up to 4% on a maximum loan amount of Rs 9 lakh. For the MIG II category, the interest subsidy is limited to 3% on a maximum loan amount of Rs 12 lakh.
The interest subsidy is for the 20 years home loan tenure. Significantly, in PMAY 2.0, the subsidy amount has been reduced from Rs 2.67 lakh to Rs 1.80 lakh. Further, this subsidy amount will not be given in one instalment as in PMAY 1.0. Rather, it will be distributed in instalments spread over 5 years.
Looking at the current dynamics of the residential real estate market, while luxury housing has been rising significantly, affordable housing has taken a consistent hit. The share of affordable housing in overall residential sales has almost halved over the last five years. In Q1 2019, affordable housing sales share across top 7 cities was 37% and now it has come down to around 20%. On the other hand the share of luxury housing which stood at 4%, has shot up to 21%.
The rising home prices and high interest rates had taken the toll of affordable housing. As a consequence of this, both supply and demand of affordable housing has been hit. Because of the shrinking profit margins, the developers have restricted supply of affordable housing and instead they have been focusing on luxury and super luxury housing with high profit margins.
With homes becoming unaffordable for the lower and middle income segment, there has been a dip in demand over the last few years especially following the steepest interest rate hike of 2.5% between May 2022 and February 2023, pushing up home loan EMIs by more than 20%. The total interest payment saw a hike of 40% for many homebuyers.
It was in April 2023 that the RBI pressed the pause button on interest rates which is still on. But despite that home loan borrowers have been experiencing either substantial increase in their EMIs or in home loan tenure. It had an adverse impact with home sales dropping by 11% in the September 2024 quarter. What has further dampened the festive spirit is that the much anticipated interest rate cut has not come through.
Going forward, the depressed home loan disbursals may gain traction in the new fiscal year with the start of interest rate cut cycle by the RBI along with stabilisation of home prices. Further, in line with the GST council’s recommendation, a possible increase in the budget home threshold from Rs 45 lakh to a minimum Rs 55 lakh will bring more home seekers under PMAY. This in turn may well boost home loan disbursals and push both demand and supply of affordable housing. And since affordable housing is largely driven by end-users, it will lead to sustainable long-term growth of the housing market.
Q1: What is the current status of home loan demand during the festive quarter of 2024?
Answer: Home loan demand is expected to decline during the festive quarter (October-December 2024) primarily due to the delay in rolling out guidelines for the home loan interest subsidy scheme under Pradhan Mantri Awas Yojana (PMAY) 2.0, along with rising home prices and high interest rates.
Q2: How has the discontinuation of the interest subsidy scheme under PMAY affected housing finance companies?
Answer: The discontinuation of the interest subsidy scheme under PMAY has negatively impacted housing finance companies, as they were relying on the reintroduction of revised guidelines to boost home loan disbursals during the festive months. The absence of the scheme has contributed to a dip in housing loan demand.
Q3: What are the key changes in the PMAY 2.0 interest subsidy scheme compared to PMAY 1.0?
Answer: In PMAY 2.0, the subsidy amount has been reduced from Rs 2.67 lakh to Rs 1.80 lakh, and it will be distributed in instalments over five years rather than in one instalment as in PMAY 1.0. The scheme is applicable for different income categories, with varying subsidy rates and maximum loan amounts.
Q4: How have rising home prices and interest rates impacted affordable housing?
Answer: Rising home prices and high interest rates have adversely affected affordable housing, leading to a significant decline in both demand and supply. Developers have shifted focus towards luxury and super luxury housing due to shrinking profit margins in the affordable segment.
Q5: What potential changes could stimulate home loan disbursals in the future?
Answer: Future stimulation of home loan disbursals may occur with the start of an interest rate cut cycle by the RBI, stabilization of home prices, and a possible increase in the budget home threshold from Rs 45 lakh to Rs 55 lakh, which could bring more home seekers under PMAY and boost demand for affordable housing.
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