Making affordable housing available to more

The market for affordable housing has been portrayed as the lone silver lining in an otherwise sluggish real estate sector, which has faced challenges over the last 3-4 years. Without a doubt, this sector — defined by property prices ranging from about ₹1 to ₹2 lakh per dwelling, up to around ₹30 lakh — is the only segment in this space which is seeing meaningful movement and sales.

Over the past two years, this sector has recorded a year-on-year increase of over 27 per cent in the number of new units launched despite the overall residential units recording a 33 per cent decline.

Critical juncture

Although these numbers paint a good picture of the current status of this sector, the housing shortage in the country is still pegged at close to 19 million. This underscores the fact that we have a long way to go. The affordable housing space remains a critical point in the Government’s agenda, given that it has promised to deliver over 22 million houses over the next five years.

The road ahead is not easy. On the return on investment front, builders find it more attractive to construct high-value projects rather than low-value ones, with smaller margins to work with. Moreover, the cost of construction of luxury properties does not increase proportionately with the overall cost of the property. Therefore, higher-profit margins are generally up for grabs, especially on land acquired cheap several years ago.

If a builder does decide to develop a low-cost property, there is uncertainty around the repayment capacity of individuals looking out for such houses. There are a fair number of affordable housing projects to explore in the sub-₹15 lakh range, with equated monthly instalments on loans for purchasing these properties not more than ₹15,000 per month. The average household income of individuals who purchase such property is between ₹3 and ₹7 lakh a year.

Any change in the financial condition of the household can relatively easily result in a delinquency situation. Therefore, notwithstanding certain attractive loan-related subsidies (most importantly through the Pradhan Mantri Awas Yojna, PMAY), the cost of repaying a housing loan still remains higher than the rental yield in most cities. While for the relatively affluent, the prospect of healthy capital appreciation could induce them to purchase and pay higher interest rates rather than rent, the opposite holds true for those who are less affluent.

Given these issues, it is more than likely that the country will face both a demand side (for buying rather than renting property in the low-cost housing segment) and supply-side challenge (increasing the pace of building more houses to achieve the Government’s target by 2022). While the provision of loan subsidies is certainly one tool in the arsenal targeted at solving the housing shortage, my estimate is that this will probably solve only about a third of the problem.

Learning from others

Clues to solve this difficult equation can be picked up from the way other countries have tackled the problem.

In some countries, there is a growing sense that state-funded rental housing can solve a part of the problem.

In the Czechoslovak Republic, Denmark, the Netherlands and the UK, as much as 30 per cent of housing is ‘socially’ created and rented out.

Another partial solution can be via long-term subsidies for purchase of property. In the Netherlands, the so-called ‘Koopgarant’ programmes allow people to purchase property at a cost 25 per cent lower than the market price, thereby reducing the loan burden.

A slightly different version of the subsidised owner-occupancy housing was formulated in Spain, which allows individuals to purchase property for a highly subsidised rate, and which can further be sold for the prevailing market rate only after a period of 30 years.

Recognising that affordable housing issues cannot be solved only through making loans cheaper but through long-term financial support to the industry, players such as HDFC have raised two large funds catering to this segment through HDFC Capital.

The Government also seems to have taken it upon itself to identify qualified buyers, either through lotteries or by organising events where the public can apply for loans. Chhattisgarh and Maharashtra seem to have made notable progress in this regard.

However, we need more tools in our arsenal to fight this problem. The construction of affordable housing has one of the highest multiplier effects on the economy, and given the Government’s recent announcement to construct an additional 1 crore homes in rural areas, one hopes that the Government takes additional steps over and above tax breaks and loan subsidies to address these issues.

The writer is Chief Operating Officer, Retail Business & Housing Finance, Tata Capital

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