Aug 11, 2023

Mortgage to GDP Ratio: Unveiling Its Influence on Mortgage Rates

by Godrej Properties Limited

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The mortgage-to-GDP ratio is a crucial metric that gauges the significance of mortgage loans in an economy's overall Gross Domestic Product (GDP). This article will delve into the mortgage-to-GDP ratio concept, its implications for India's real estate sector, and how it compares to other countries. Let's explore why raising this ratio could benefit India's economic growth and housing demand.
 

Understanding Mortgage to GDP Ratio

Mortgage rates refer to the interest percentage a lender charges on a home loan. These rates can vary depending on economic conditions and individual factors, affecting the cost of borrowing for prospective homebuyers.
 

The mortgage-to-GDP ratio quantitatively represents the outstanding mortgage loans in a country relative to its GDP. It serves as a crucial indicator of the housing market's vitality, reflecting the level of mortgage debt in proportion to the nation's overall economic output. 

Advantages Of Raising the Mortgage to GDP Ratio

Increasing the mortgage-to-GDP ratio can yield several benefits. Some of the benefits are:

  • Firstly, it would signal a growing and robust housing market, attracting more investment and stimulating more economic activity in the country.
  • Secondly, higher mortgage lending can drive the construction industry, generating employment opportunities and contributing to economic growth.

Factors Influencing Mortgage to GDP Ratio In India

Impact of Interest Rates

The prevailing interest rates on mortgage loans significantly influence the borrowing behavior of home buyers. Higher interest rates may lead to cautious borrowing; conversely, lower rates may spur demand in the housing market.

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Government's Tax Deduction Incentive

The government's policies, particularly tax deductions on mortgage interest payments, are vital in encouraging homeownership and boosting the mortgage market's growth. More incentives equals more parties interested in real estate. 
 

The Housing Demand Amidst The Global Crisis

Despite global uncertainties triggered by events such as Russia's conflict with Ukraine, housing demand in India remains resilient. After two years of the pandemic, people are eager to upgrade their existing homes, fueling the demand for mortgage loans.
 

India's Mortgage to GDP Ratio - A Comparative Analysis

India's mortgage-to-GDP ratio currently stands at 11%, significantly lower than that of countries like China (18%) and the United States (52%). In a recent statement, Deepak Parekh highlighted the need for India to raise this ratio to match global peers. He emphasised that the country's housing demand has never been higher, even amid rising interest rates and the aftermath of the COVID pandemic.
 

Conclusion: Why Mortgage To GDP Ratio Matters

The mortgage-to-GDP ratio reflects the depth and maturity of a country's housing finance system. As India aims to boost its housing market, addressing challenges and implementing conducive policies can elevate the mortgage-to-GDP ratio, driving sustainable economic growth in the long run.
 

FAQ

Q: How is the mortgage-to-GDP ratio calculated? 

A: The mortgage-to-GDP ratio is obtained by dividing a country's total outstanding mortgage loans by GDP and multiplying the result by 100.
 

Q: Why is a higher mortgage-to-GDP ratio desirable? 

A: A higher mortgage-to-GDP ratio signifies a more developed and active mortgage market, contributing to economic growth and stability.
 

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