India’s Affordable Housing Story – No Happy End in Sight?

by Akash Pharande, managing Director - Pharande Spaces

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Affordable housing is about providing decent homes at low prices that are within reach of lower- and lower-middle-income buyers. There are many definitions of affordable housing, but the government defines it as homes with a carpet area of up to 60 square meters. A house must cost no more than Rs. 45 lakh to be considered affordable housing by the government definition.

Affordable housing projects must utilize at least 60% of the available FAR/ FSI for homes that do not exceed 60 sqm. in size. Also, 35% of the total number of houses developed in such projects should be 21-27 sqm carpet area to make them affordable to EWS (economically weaker section) buyers.

Government support

Such housing has been made more affordable for such households by several government initiatives, including tax exemptions and lower mortgage interest rates – and various subsidies and rewards for developers who build such housing. These include:

  • Infrastructure status for affordable housing allows developers to get project funding from many sources – including external commercial borrowings (ECB), foreign venture capital investors (FVCI), and foreign portfolio investors (FPIs).
  • Unlike other housing, which must be completed within three years, affordable housing projects have an extension of two additional years.
  • Developers of affordable housing benefit from a lower tenure for long-term capital gains – two years instead of the usual three.
  • Developers of such projects enjoy an enhanced refinancing facility from the National Housing Bank (NHB) to fund their projects.

As of an announcement issued in September 2021, the Indian government has developed more than 1.12 crores homes out of the promised two crores under the Pradhan Mantri Awas Yojana (PMAY) scheme. Launched in 2015 to provide affordable housing to the economically weaker sections (EWS), low-income groups (LIG), and middle-income groups (MIG) in urban and rural areas of India by 2022, PMAY has consistently been in the cynosure of the Indian affordable housing debate.

Still in doldrums

Other than that, the ground reality of affordable housing is quite depressing. The government has yet to get many developers interested in affordable housing. One of the most significant problems is the government’s current definition of affordable housing. The size of apartments under the existing definition makes sense since affordable housing needs to be smaller to keep costs in check.

But limiting the cost of homes to Rs. 45 lakh doesn’t work in most larger cities. This pricing definition is out of step with ground reality. In most major cities, the prices of even the cheapest homes are higher than – and prices have risen for the past year or more, making homes even less accessible.

The Rs. 45 lakh cap can only work in smaller cities and very remote areas – and even there, prices are growing now. We must consider that people are steadily moving to places like Mumbai, Pune, and Bengaluru in search of better work opportunities. They want homes from where they can reach their places of work. The price cap needs to be increased to at least Rs. 70-75 lakh to allow more people to take advantage of government incentives for affordable housing.

The claim that this will also help the middle class’s wealthier members does not hold. Since the Covid-19 outbreak, middle-class purchasers have primarily searched for larger homes with two or more bedrooms. Developers have mainly produced housing complexes with larger apartments and more lifestyle amenities to accommodate middle-class demand.

Decreasing supply

The problems also go deeper. Because of the lack of demand, there has been a steady decline in the supply of affordable homes over the past 2-3 years. According to the Ministry of Urban Housing (MoHUA), only 10% of the current housing supply is affordable. This means that there are fewer options for buyers with lower incomes.

Also, affordable housing projects have a substantially smaller profit margin than larger-format mid-income homes. As a result, developers are much less motivated to develop such projects.

The current government incentives need to be increased. One of the possible ways to attract developers is by giving them dedicated land owned by government agencies, such as the railways, at subsidized rates. Many such lands are in the central urban areas – precisely where the need for affordable housing is the highest.

Due to urbanization and industrialization, the price of land has been rising in India, making it more challenging to acquire it for affordable housing projects. Moreover, labour, equipment, and building supplies costs have tremendously increased in the past three to four years, making it more expensive to develop affordable housing.

Undoubtedly, the Indian affordable housing story needs a solid new chapter to be written – one which turns the story’s plot into a more compelling ‘read’. While we wait for this to happen, countless lower-income Indians await a happy ending where they can finally purchase their own homes.

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