Subsidy For Bigger Homes Will Bring Limited Gains

Buyers of bigger homes will now be eligible for interest subsidy under the Prime Minister Narendra Modi’s affordable housing scheme. That will bring limited benefit though, at least in the near term.

Here’s why: as the income cap under the scheme remains at Rs 18 lakh, most people borrow loans for smaller homes; and there’s not much inventory of bigger units in smaller cities. That’s what data and real estate experts suggest.

The government increased the carpet area of homes eligible under Credit Linked Subsidy Scheme for middle-income buyers in two categories: Rs 6-12 lakh and Rs 12-18 lakh a year. Along with extending the term of the scheme till March next year, the maximum carpet area of homes eligible was increased from 120 square metres (1,292 square feet) to 160 sq. mt. (1,722 sq.ft.), and from 150 sq. mt. (1,615 sq. ft.) to 200 sq. mt. (2,153 sq. ft.) for the borrowers in the two categories.

Income Cap Will Partly Offset Benefit

There was a set of people who couldn’t avail the scheme earlier as the area of the home exceeded the limit, Harshil Mehta, joint managing director and chief executive officer of Dewan Housing Finance Ltd., told BloombergQuint over the phone. Such buyers will now benefit, he said.

Not many borrow loans for such big homes though, at least in metros and tier-I cities. That’s because the cost is beyond buyers within the Rs 18 lakh income cap. The cheapest average home price among the eight metros is in Kolkata at Rs 3,736 a square foot as of December 2017, according to PropEquity. At that rate, a home at the upper carpet area limit will cost about Rs 80 lakh—excluding stamp duty and registration.

An income of Rs 18 lakh would allow an individual to take a loan of up to Rs 50 lakh with an equated monthly instalment of up to Rs 50,000, according to Mehta. So increasing the carpet area wouldn’t help such a borrower in Kolkata. And prices in other metros are higher.

Most people don’t borrow more than Rs 25 lakh for a house, according to National Housing Bank’s annual report for 2016-17. Which means, buyers usually take loans for smaller homes.

Even in tier-II to IV cities, a lot of houses are available in Rs 18-25 lakh, Rajiv Talwar, chairman of real estate developers’ association Naredco, told BloombergQuint over the phone.

Kotak Institutional Equities, in its research note, said so far the credit subsidy has been more useful for the lower-income segments as it acts as a big discount. About 80-87 percent of the cumulative subsidy disbursed under the scheme has been largely driven by economically weaker sections and low-income groups, it said citing NHB data.

The government had increased the carpet area earlier as well. That pushed up the share of medium-income buyers from 12 percent in December to 20 percent in May, Kotak Securities said.

Anuj Puri, chairman of Anarock Property Consultants, expects the immediate benefit of the scheme to be incremental. “There may not be a significant inventory that fits in the home buying criteria for MIG (middle-income) buyers considering that there is an upper cap of Rs 18 lakh annual household income to avail subsidies,” he said.

Yet, the move is expected to boost construction of bigger houses beyond the metros and tier-1 cities. “We will need a lot of housing construction development in the Uttar Pradesh, Bihar, Jharkhand and Chattishgarh where the land cost will be cheaper and houses with enhanced area will be available for these income groups,” Talwar of Naredco said.

Maharashtra traditionally has been the biggest housing market, going by the 2016 NHB data of home loan disbursals. Tamil Nadu, Uttar Pradesh, Gujarat, Rajasthan and Madhya Pradesh follow.

As of now, one set of buyers definitely stand to gain. Those who bought their homes this year but were left out because the size of their houses didn’t fall within the eligibility. That’s because the government has increased the carpet area cap retrospectively since Jan. 1.