Impact Of Covid-19 On Housing Finance.

In any economic crisis, some segments fare better than others. When it comes to COVID-19, however, almost no segment came out unscathed. This impact has been felt in the housing finance sector. Who, exactly, is included in this sector?

What is the housing finance sector?

This is a sector of the country’s economy including all of the non-banking financial companies that are engaged in the business of financing the construction and acquisition of houses. This sector is also involved in the development of plots for the construction of fresh properties. This sector is heavily reliant on a functional economy and was therefore struck quite intensely by the pandemic.

Impact of Covid-19 on Housing Finance

COVID-19 resulted in central banks all over the globe using three key tools to make the most out of the housing situation: Open market operations, interest rates, and reserve requirements. RBI (the Reserve Bank of India) also came out with slashed repo rates, reaching a two-decade low at 4.4 percent. Additionally, the RBI slashed the reverse repo rate to 3.75 percent and the cash reserve ratio to just 3 percent. Additionally, ‘Targeted Long Term Repo Operations’, abbreviated to TLTRO 1.0 and 2.0 were also introduced.

Essentially, with each of these policies, the government was attempting to make home loans more affordable during a time of crisis where job security for most sectors was not guaranteed. The public received the housing loans policy changes mandated by TLTRO 1.0 relatively well. However, this plan seemed to benefit AAA-rated Housing Finance Companies the most. An AAA rating implies that the services offered by these companies have the lowest possible degree of risk regarding timely servicing of financial obligations. It is usually ascribed to larger well-established companies.

Noting this unfair advantage, TLTRO 2.0 was announced by the government. This plan was targeted to offer financial support to smaller companies, particularly providing support to smaller Non-Banking Financial Companies (NBFC), Housing Finance Companies, and Microfinance Companies in India. However, this TLTRO 2.0 received a tepid response from the public. The general consensus has been that the pandemic improved the strength of companies that were already well-established, while micro-companies suffered much more.

Moving onto real estate: a sub-sector that is among the largest contributors of GDP in India. This segment of housing finance has gone through its fair shares of troubles in the last decade. Two interpretations overshadow the consensus of how the ongoing pandemic has impacted real estate. One approach cites the fact that the lower economic strata has been most affected because of the lockdown. Ultimately, this has resulted in lower demand for affordable housing. On the other hand, there has simultaneously been a clampdown on discretionary spending, particularly from high-income groups, in addition to a flight to a value.

This outcome has led to a somewhat notable increase in demand for affordable housing when it comes to the lower and middle segments. With migrants wanting to return to villages, the non-availability of the workforce is an immediate concern. To add to this, new housing projects require a lot more time, with builders mobilizing their resources to ensure completion. Hence, the general outcome has been somewhat negative yet optimistic when it comes to demand.

Is there a silver lining?

Working from home is the new office. This is touted as a silver lining resulting from continual lockdown. Most companies have been seamlessly able to transition to working remotely. Housing customers found it much easier to connect with lenders. Alternatively, lenders too were able to reach out to a large number of customers within a shorter time frame. This has been credited to the high penetration of smartphones, social media, and online work.