Lending by Indian banks to the housing sector increased by 14% to Rs369,900 crore at the end of October 2011 from Rs324,748 crore at the end of 2010. It had risen by 12% in October 2010 over the previous year, according to data from the RBI.

"The demand for home loans will remain strong going forward as a large number of households in India still does not have their own houses," Axis Bank. "Axis bank home loan are seeing healthy demand from smaller cities." To control rising inflation, the RBI has hiked the repo rate 13 times by a cumulative 3.5 % points since March 2010, forcing banks to increase lending rates including interest rates on home loans.

Demand from smaller cities is driving home loan growth. "There is a substantial difference between real estate prices in metros and smaller cities,". "But there is more or less wage parity amongst buyers in metros and smaller cities, so a buyer in tier II and tier III city has more disposable income, and can buy a house easily compared to say someone staying in Mumbai."

Real estate developers who have been facing an inventory pile-up in tier 1 cities have seen their sales volumes go up in tier II and tier III cities. So while the Mumbai Metropolitan Region (MMR) has witnessed around 25-30% fall in sales volumes due to steep prices, smaller cities continue to see sales happening, say analysts.
Big developers such as DLF, Shapoorji Paloonji, Ansal Properties have also forayed into tier II and tier III cities.