India and the rest of the world came to a literal standstill with Covid-19 in 2020, and the brief recovery thereafter was followed by the Russia-Ukraine war – which has negatively reset the whole world’s economic barometer. Next came the bursting of a tech boom bubble created by the Covid-19 pandemic, with mass layoffs at some of the world’s wealthiest companies – most of them major employment generators in India – which are still underway.

Despite all these upheavals 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. Once the source of considerable political hype, this segment is not merely just languishing today – it seems to be in the ICU. What happened?

Situation Critical

There are several reasons why affordable housing is in the doldrums today. One is land. While developers can easily recoup their land costs with mid-range and premium housing, affordable housing is another matter. Though it is aimed at the lower end of the economic pyramid, it still requires land. It’s not there is no land available – but in our bigger cities, it costs so much that only costlier housing makes financial sense to developers.

Where land is available – namely the cheaper far suburbs – there are invariably severe infrastructure challenges. When an affordable housing project is in an area with very poor infrastructure, such as public transportation, well-made roads, and basic amenities like water and electricity, there will be very few buyers.

Another pain point is the 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 even as private equity players predominantly favor bigger developers. Affordable housing is still considered very risky, and the returns on investment are too small to be enticing.

Yet another challenge this segment faces is its target audience. A large proportion of the Indian population earns low incomes, and this makes it hard for them to pay for even the most basic housing. There may be a huge affordable housing deficit, but the actual buyer base is people who are most affected by the economic turmoil – junior-level software employees, and most people doing blue-collar jobs in the manufacturing and services sectors.

Affordable Housing Sales Share

Not surprisingly, the affordable housing segment (units priced <INR 40 lakh) saw its overall sales share dip between 2019 and 2022. Data indicate that back in 2019, out of the total sales of nearly 2,61,400 units across the top 7 cities nearly 38% of 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 dip in overall sales share as well.

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 favor of renting.

Moreover, affordable housing developers’ profit margins were already wafer-thin. And amid rising inflationary trends of basic input costs (cement, steel, labor, etc.), it has become even more difficult for them to launch budget homes since increasing prices in this highly cost-sensitive segment defeats the purpose.

If we are to see the current demand, then it is mostly skewed towards mid and premium segments priced between INR 40 lakhs and INR 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 be seen in the data of the new supply entering the market as developers today are consciously launching projects based on consumer demand.

Affordable Housing New Supply Share

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

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

Available Inventory in Affordable Housing

As per 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 <INR 40 lakh.

Affordable Housing Consumer Demand Trends

ANAROCK Consumer sentiment survey conducted in 2022 highlighted that demand for affordable housing reduced to its lowest levels in 2022 in the last five years. Back in 2018, at least 39% of property seekers were looking to buy an affordable property within INR 40 lakh in the top Indian cities. However, this demand shrunk to its lowest levels in 2022 with just 26% of property seekers looking to buy in this budget.

PMAY – Latest Progress

No doubt, PMAY (Urban) has shown progress since its implementation in mid-2015. As per the 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. Approx. 72.56 lakh homes have been completed while working on approx.109.23 lakh units have been started. In terms of the financials, nearly INR 2.03 lakh crore of central assistance has already been committed.

What Other Solutions?

It will take a comprehensive strategy that includes many moving parts, all working towards a unified goal – that of reviving the flagging fortunes of India’s affordable housing sector.

The government can unlock government-held land for affordable housing development. A lot of such land is in urban areas where the need for affordable housing is the highest – and most of it is doing nothing ‘constructive’ as of now. 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 that has been floated in the past and continues to be extremely pertinent is revising the price bandwidth for homes that qualify for the government’s various incentives to affordable housing buyers. The current INR 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 support 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 house more than 80% of the country’s population.

About the author- Anuj Puri, Chairman – ANAROCK Group