Affordable Housing at Crossroads

Despite all the upheavals like Covid- 19 pandemic and the Russia-Ukraine war and market realignments in the past three years, India’s housing market remained remarkably resilient and even thrived. However, there seems to have been one major ‘fatality’ – affordable housing. which had emerged as a major growth driver of residential realty. Today,  this segment is not just languishing, rather it seems to be in critical condition. What has brought affordable housing at the crossroads?

There are several reasons why affordable housing is in doldrums today. One, obvious reason is the spurt in land costs.  While developers can easily recoup their land costs with mid-range and premium housing, it is not possible with affordable housing where there are thin margins. Unfortunately, today there is a dearth of land in big cities and even if it is available, it is so costly that affordable housing does not make financial sense to developers.

Though it is possible to get cheaper land in suburbs,  there are invariably severe infrastructure challenges. When an affordable housing project is in an area with very poor infrastructure related to public transportation,  roads, and basic amenities like water and electricity, there are very few buyers. Another pain point is lack of financing options for affordable housing. Many developers of affordable housing are smaller players with little or no collateral for debt borrowing, which is in any case exorbitantly expensive. Moreover,  private equity players predominantly favour bigger developers. Affordable housing is still considered very risky, and the returns on investment are too small to be enticing.

Besides supply-side constraints, there is a demand-side challenge with regard to the paying capacity of large proportion of the low-income earning population having blue – collar jobs in the manufacturing and servicing sector, at which affordable housing is targeted. It is little surprising then that the affordable housing segment (units priced below Rs 40 lakh) saw its overall sales share dip between 2019 and 2022. Data indicates that back in 2019, out of the total sales of nearly 2,61,400 units across the top 7 cities nearly 38% sales were in the affordable segment. But in 2022, out of the total 3,64,880 units sold across the top 7 cities altogether, about 26% were in the affordable category. Thus, there has been a  substantial dip in overall sales share of affordable husing… 

The notional demand for affordable housing is high, but actual affordability is limited. The target audience has been severely impacted by the pandemic in contrast to premium and luxury category buyers and many are now deferring purchase decisions in favour of renting.Moreover,  rising inflation has had a negative impact on supply. The profit margins of affordable housing  developers’ have  already  been wafer-thin. and as such in the wake of rising costs of basic construction materials like cement and steel , besides costly labour , it has become even more difficult for them to launch budget homes for the price-sensitive segment .

If we are to see the current  housing demand, then it is mostly skewed towards mid and premium segments priced between Rs 40 lakhs and Rs 1.5 Cr. These two segments have done significantly well post the pandemic and millennials are the key demand drivers. These millennials include the new-age tech savvy professionals working in the services sector such as IT/ITeS, or businesses such as start-ups etc. This can clearly be seen in the data of the new supply entering the market as developers today are consciously launching projects based on consumer demand.

With demand for affordable housing  shrinking over the last few years , developers have also changed gears to match demand by launching more projects in the mid and premium segments. The direct fallout of this is that the supply share of affordable housing has been on a constant  decline in the last five years and has reached the lowest in 2022.

As per Anarock Research, out of  the total 3.58 lakh units launched in the top 7 cities in 2022, affordable housing share was as low as 20%. Back in 2018, out of total 1.95 lakh units launched then, affordable housing had the maximum share of 40%. 

Source: ANAROCK Research 

Out of the total available inventory of more than 6.30 lakh units across the top 7 cities as of 2022-end, nearly 27% are within the affordable segment priced below Rs  40 lakh. 

Anarock Consumer Sentiment Survey conducted in 2022 highlighted that demand for affordable housing plunged to its lowest levels in 2022 in the last five years. Back in 2018, at least 39% property seekers were looking to buy an affordable property within a budget of Rs 40 lakh in the top Indian cities. However, this demand shrunk to its lowest levels in 2022 with just 26% property seekers looking to buy home  in this budget.

Amidst plunging fortunes of affordable housing,  the flagship housing programme of the central government- Pradhan Mantri Awas Yojana (PMAY-Urban)  has shown progress since its implementation in mid-2015. As per the statistics of  Ministry of Housing and Urban Affairs (MoHUA), as many as 122.69 lakh homes had already been sanctioned by the government as of March 2023. Nearly 72.56 lakh homes have been completed while work on nearly.109.23 lakh units has been started. In terms of the financials.Nearly Rs 2.03 lakh crore of central assistance has already been committed.  Having said that, It will take a comprehensive , well-coordinated and concerted strategy to revive the flagging fortunes of India’s affordable housing sector.

The government can unlock land parcels held by it for affordable housing development. A lot of such land is available in urban areas where the need for affordable housing is the highest  and most of this land is not being put to any constructive use . By unlocking such land within the municipal limits of our cities, the government can attract developers who can turn a good profit while simultaneously passing on the benefits of cheap land availability to both end-users and investors.

Another key intervention which has been floated in the past and continues to be extremely pertinent is revising the price bandwidth for homes which qualify for the government’s various incentives to affordable housing buyers. The current Rs 45 lakh limit means that buyers cannot look anywhere within the city limits but must turn to the infrastructure-deficient far suburbs. The government should also streamline the approval process for affordable housing, extend more tax incentives to private players, and increase funding for affordable housing via Public Private Partnerships.

By providing tax breaks and other incentives, the government can encourage the construction of affordable housing in non-metropolitan areas while at the same time ensuring that these areas are first equipped with the requisite supporting infrastructure. Policy tweaks can ensure that financial institutions offer developers of affordable housing better financing options, such as equity financing, long-term debt financing, and concessional loans.

Finally, developers can use novel building methods that lower construction costs and improve the financial viability of affordable housing.It is doable – but it will take massive, concerted political will to see it through. We have seen it happen in other countries – such as the public housing push in Singapore, where the Housing Development Board (HDB) has, in six decades, built homes that houses more than 80% of the country’s population. There is an urgent need for a panacea for affordable housing in India.       Anuj Puri, Chairman, Anarock Group