AFFORDABLE URBAN HOUSING: A SITUATION REPORT ON POLICY AND

PRACTICE IN INDIA.

DR.KALPANA GOPALAN, IAS.

10/15/2014

AFFORDABLE URBAN HOUSING: A SITUATION REPORT ON POLICY AND PRACTICE IN INDIA.

Dr.KALPANA GOPALAN, IAS, PGPPM & PH.D, IIM Bangalore.

1. Introduction.
i.

Setting the Tone: What is Affordable Housing?

Affordable Housing is fast taking centre stage in the national agenda. In India, affordable
housing is a term largely used in the urban context. This is more a matter of administrative
logistics: at the national level, the rural housing sector falls within the purview of the Ministry of
Rural Development, while the Housing and Human Settlements in urban areas is the
jurisdiction of The Ministry of Housing and Urban Poverty Alleviation. It is the latter ministry
that has spearheaded affordable housing as a concept and policy.1

Affordable housing refers to any housing that meets some form of affordability criterion, which
could be income level of the family, size of the dwelling unit or affordability in terms of EMI
size or ratio of house price to annual income (High Level Task Force on Affordable Housing for
All, December 2008, p. 7) . Affordability is itself a relative concept. In North America, the
descriptor refers commonly to housing whose cost does not exceed 30% of a households
income. Defining affordable housing in India, however, is difficult owing to the vastness,
heterogeneity and the fact that the market dynamics differ across regions and cities. The
MHUPA in its 2011 report takes note of both income and size criteria to define the concept: 1

EWS

LIG

MIG

Size

EMI or Rent

Minimum of 300 sq ft super built-up area

Not

Minimum of 269 sq ft (25 sqm) carpet area

30-40% of gross

Minimum of 500 sq ft super built up area

monthly

Maximum of 517 sq ft (48sqm ) carpet area

of buyer

600-1200 sq ft super builtup area

Maximum of 861 sqft (80sqm) carpet area

(MHUPA, 2011).

exceeding

income

On similar lines, the KPMG report describes affordable housing as follows:

Income Level
EWS

Size of Dwelling Unit

Affordability

<INR 1.5 lacs per Upto 300 sq. ft.

EMI

annum

Income

to

Monthly

30

to

40

percent

LIG

INR 1.5 to 3 lacs per 300 to 600 sq. ft.

House

Price

to

annum

Annual Income Ratio

Less than 5.1 (Deepak
Parekh Task
Force)

MIG

INR 3 to 10 lacs per 600 to 1200 sq. ft

annum

(KPMG, 2010, p. 5).

The RICS Report on Making Urban Housing Work in India defines affordable housing as the
provision of adequate shelter on sustained basis, ensuring security of tenure within the means of
the common urban household (RICS Research, November 2010). The inherent complexity of the
term is brought out in the Habitat Agenda definition: Adequate shelter means more than a roof
over ones head: It also means adequate privacy; adequate space; physical accessibility; adequate
security; adequate lighting, heating and ventilation, adequate basic infrastructure-all of which
should be available at affordable cost (in (High Level Task Force on Affordable Housing for
All, December 2008, p. 7). Affordable housing is a larger concept than low cost housing, it
includes within its ambit low and middle income group housing with a larger basic amenities like
schools and hospitals. From the above, it is clear that a one size fits all approach cannot and will
not work in the affordable housing sector.1

ii.

Motivation: Why is Affordable Housing Important?

The demand drivers for affordable housing are several. First is the progressive urbanization hand
in hand with a growing urban population, from 109 million in 1971 to 377 million in 2011
toward a whopping 600 million by 2030. The consequences of the growing concentration of
people in urban spaces is felt in land and housing shortages and congested transit, besides
stressing basic amenities such as water, power and lung space. The Ministry of Housing
estimated a housing shortage of 18.78 million during the 12th plan period, with 99 percent in the
economically weaker and lower income groups (Ministry of Housing & Poverty Alleviation,
GOI, September 2013, p. 2).1 This in turn has led to the proliferation of slums and slum
population; 65 million as per Census 2011 (Ministry of Housing & Poverty Alleviation, GOI,
September 2013, p. 2). Second, alongside the growth of the urban population, rising incomes
have led to the expansion of the middle class. This has led to a spike in demand for housing that
is affordable but includes basic amenities.1
Third, the real estate sector is a major component of Indian economy. At Rs.170 crore, it
contributed 4.5 percent crore in Indias GDP and employed 7 percent of the urban workforce in
2006-7. Housing is the largest component of the financial sector and construction sector as well
(High Level Task Force on Affordable Housing for All, December 2008, p. 6). Affordable
housing draws its importance from significant externalities as well.

It has been seen as

impacting property values (Ahrentzen, 2008) crime rates (Horner, 2009), health outcomes and
educational levels 1(Braconi, 2001) all in (George, November 2012)). Its multiplier effects on
employment, poverty reduction, household optimism and investment, and contribution to a
democratic society have been noted. Hence, from the point of view of demand growth and
significant impacts, affordable housing compels attention from scholars, practitioners and
policymakers alike.

2. The Current Status.1

1. Public Sector Institutions & Practice.1
At the national government, the Housing and Human Settlements sector is the purview of The
Ministry of Housing and Urban Poverty Alleviation. The policy framework is provided by the

National Urban Housing & Habitat Policy 2007,1 along with the Jawaharlal Nehru National
Urban Renewal Mission 2005, Basic Services for the Urban Poor, Integrated Housing & Slum
Development Program and the Rajiv Awas Yojana. The NUHHP 2007 lists a number of
objectives that include urban planning, land availability, special provisions for women, public
private partnerships, management information systems and so on. With respect to affordable
housing, it aims to: accelerate the pace of development of housing and related infrastructure;
create adequate rental and ownership housing stock while improving affordability through
capital or interest subsidies; use technology to modernize the housing sector for energy and cost
efficiency, productivity and quality, green and intelligent building and mitigate disaster impacts.

The JNNURM 2005 was launched with the objective of encouraging and expediting urban
reform, and includes within its ambit construction of 1.5 million houses for the urban poor in 65
mission cities between 2005-12. The BSUP is managed by the Ministry of Urban Development,
and seeks to provide seven entitlements: security if tenure, affordable housing, water, sanitation,
health, education and social security to low income 1segments in 65 mission cities. The IHSDP
covers those cities/towns that are not covered by BSUP, and conceives of an 80:20 sharing ratio
between the national and state governments/ULBs/beneficiaries.

2. Private Sector Players and Practice.

From being a near exclusive public sector domain affordable housing has progressively attracted
growing interest from the private sector. Several factors propelled this development. The demand
slowdown of 2008-09 led to exploration of diversification options for developers in the
affordable segment. Easier availability of land in the suburban areas along with infrastructural
connectivity, availability1 of facilitating and financing agencies such as the National Housing
Bank, International developmental organizations, International NGOs, micro finance institutions
and private equity players, economies of scale and first mover advantages have also propelled
this interest. From 2009 onwards, real estate developers have launched projects across Indian
cities in leapfrogged locations and multiple nuclei models. Such targeted such growth is seen in
over 15 projects including Karjat, Palghar and Boisar in Mumbai, Narol and Vatwa in
Ahmadabad, Anekal in Bangalore. The more prominent developers include Tata Housing (Shubh

Griha), VBHC, Foliage, DBS Affordable Home, Nirman Group, HDIL, TVS Housing, S.Raheja,
Mahindra Lifespaces and Usha Breco Realty. Typically, the projects are located 20-25 km from
the city centre, cover 15-35 acres with 1500-3500 units. The projects are characterized by limited
options, closeness to industrial or commercial hubs, reduced area, low construction cost, shorter
period of construction and provision of basic social amenities. The pre-tax IRRs in a low cost
housing project can range from 40-45% with gross profit margins of 15-20%. While there are
instances of several projects that were sold out within days or weeks of launch, unavailability of
suitable land, low value of returns and scarce financing make it imperative for developers to
shorten construction time, lower cost, de risk from land acquisition costs and adopt a working
capital model with assured and faster cash1 inflows (Jones Long Laselle, 2012).

3. Critical Issues in the Affordable Housing Sector.

a. Scarcity of land. The high population density, rapid urbanization, poorly conceived regulations
all have created shortage in land parcels capable of development.

This is exacerbated by

excessive controls over central districts of cities and difficulties in land recycling, which results
in a centrifugal push toward the periphery. Land acquisition has been a thorny issue1, giving rise
to land mafias and illegal encroachments, reducing availability of cheap land.
b. Scarcity of marketable land parcels. Large tracts of centrally located urban land are owned by
public entities such as railways, ports and defense authorities. These are non-marketable pockets,
and lend themselves to the proliferation of slums and squatter settlements as the authorities are
often unable to monitor their holdings. Scattered and poorly planned settlements make it further
difficult to provide land for mass housing. Property buyers take many factors other than project
quality and cost, such as basic utilities, connectivity, infrastructure and so on. Thus affordable
housing demands adequate supply of well-serviced land and this in turn influences prices and
willingness to pay1.
c. Titling Issues. As of now, India lacks a robust system to protect land rights. There are two
aspects to land title: the first the formal recognition by the state of property rights through a
system of titles; and second the facilitation by the state, of efficient trade in rights, through a
process of registration. Both of these elements exist in India, but in incomplete form. First, not
all land transactions require registration, for example land acquisition, court decrees, mortgages,
agreements and so on. Second, while Indian law requires compulsory registration of land sale,

the registration authority is not mandated to verify history or ownership; thus it is the transaction
and not the title that is registered.
d. Rising Costs. Both land and construction costs have increased, compounded by price
appreciation of construction materials and labour. Financing affordable housing is constrained
because of different construction1 indices and incomes across the country. From the customers
angle, obtaining finance is difficult even if they have regular incomes; in case they are employed
in the unorganized sector or lack income proof required in the loan process.
e. Regulatory Constraints. Project sanctions can take years, spanning as many as forty departments
across the national and sub-national levels, whether it is environment, fire, revenue, water, traffic
police and so on. The consequent high time and transaction costs deter many entrepreneurs. Lack
of transparent regulation aggravates the situation, with building bye laws and rules for Floor
Space Index and zoning and development plans of urban local bodies lack clarity and there are
overlapping1 guidelines.

4. A review of best international / national practices: Global Parallels.

Globally, affordable housing initiatives fall into two broad strategic approaches. Countries like
Singapore, the Netherlands, Sweden and Denmark follow the universal approach, whereby the
entire population is provided with decent and affordable housing. More common is the targeted
approach of countries like Canada, Malaysia, USA and most of the EU, wherein weaker sections
are the focus so that they would not get excluded from the housing market. Both supply side
(public housing or assistance to developers)1 and demand side subsidies (periodic cash
allowances or capital grants to support housing costs) are common practice; ranging from
subsidized rentals in the Netherlands to subsidized ownership in Spain. Many countries combine
rental and ownership schemes. Private participation is encouraged in various ways: density
bonuses are provided in the USA, mixed use housing in the UK, fee waivers and fast tracking
procedures in Malaysia and Canada. Malaysia has also established PPPs with role definitions for
the public (land and procedures) and private players (finance and execution); while California
has emerged as a leading state with a comprehensive legislative package for low income housing
with inclusionary zoning; Singapore1 and Hong Kong have experimented successfully with
commercial-low cost cross subsidization.

5. Preliminary Views & Approach: The Road Ahead: Challenges and Potential.
Developing affordable housing on a large scale is the greatest challenge in urban India today,
promising a solution to the proliferation of slums, unorganized real estate development,
unplanned growth and transit congestion1. It is vital that certain critical issues are addressed
urgently to make affordable housing a possibility.

On the demand side, identification of the right clientele, micro mortgage financing mechanisms
and self help1 groups for larger reach with flexible paying mechanisms to cater to variable
income flows are called for.

On the supply side, incentivisation through policy (extra floor space index, free sale areas and so
on), schemes for slum redevelopment and rehabilitation, adequate availability of land,
streamlining of land records, inclusion1 of mass housing zones in CDPs, and encouragement to
private participation and partnership, single window clearance for smaller projects on the lines of
large township projects are necessary.

Developers need to focus on the marketability of small formats with reduced down payments.
Success in the affordable housing segment demands management of project cost and timelines so
as to prevent cost-time1 overruns.

Inadequate infrastructure is a challenge. As developments increasingly tend for suburban and

semi urban locations, the concomitant development1 of connectivity and access becomes vital.

There is also a special responsibility on the state to create an enabling environment for affordable
housing developers, not necessarily through subsidies but by fast tracking the approval
processes, demystifying land laws1 and deconstricting the financing and land assembling
processes, and innovative mechanisms such as earmarking areas for development, encouraging
public private partnerships, and rethinking FSI limits.

In respect of subsidies, targeted subsidies to low income segments can be continued; and in
addition, enabling low cost1 credit to low income developers and HFCs can be enabled.

A robust industry calls for better customer education, more transparency and better
communication. Industry associations, International Development Agencies, practitioners should
collaborate periodically1 to monitor the market, disseminate information and provide feedback to
both industry and the general public.

Affordable housing thus calls for1 collaborative multi pronged and concerted effort from all
stakeholders.

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