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A Case For Housing The Poor

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Housing projects for the urban poor have failed to keep up with the pace of urbanisation in India. As a consequence, several families live in cramped, sub-standard and often rented accommodation, with limited access to civic amenities. And it is not just the poor. Even families with a monthly household income of Rs 10,000-25,000, who can afford to buy houses priced between Rs 4 lakh and 10 lakh without any aid from the government, face similar conditions.

According to our State of the Low-income Housing Market report, 15 million new homes in the low-income category are required, translating into an opportunity of Rs 9 lakh crore for developers and Rs 7 lakh crore for housing finance companies.

An Active But Limited Private Sector
The report highlights that 78,000 houses (built on private land) have been sold in over 130 projects across 22 cities in India by private developers without any significant assistance from the government. In fact, with access to housing finance for formal and informal (with no proof of income) low-income customers improving, private developers are building more low-income housing (LIH).

While this clearly demonstrates the viability of low-income housing, the numbers are way short of what is required. We need millions of houses, not tens of thousands.
Ashish Karamchandani, Vikram Jain & Aditya Agarwal
An Emerging Ecosystem
Developers building LIH are mid-sized, see opportunity, and intend to continue developing LIH:
• The vast majority, 86 per cent of the 27 LIH developers
we interviewed, was confident about the viability of their business. And 90 per cent intended to continue build ing LIH. The fact that two-thirds of the developers were already on their second or third project goes to show the economic viability of the business
• The developers were typically small and medium regional developers who started serving the segment because of the potential demand and not social motivations.
Most LIH projects sell 80 per cent units within 12 months, confirming the robust demand
Most LIH projects are mixed-income and most houses are between Rs 6 lakh and Rs 10 lakh:
• Sixty per cent of the total supply is in mixed-income projects with units above and below Rs 10 lakh
• Thirty per cent of LIH supply was priced under Rs 6 lakh. A robust supply was also seen in Rs 10-12 lakh price point (see Limited Supply) Housing finance companies (HFC) serving informal low-income buyers are enabling inclusion:
• Nearly 75 per cent of the informal sector customers had never taken a loan from a formal financial institution
• The new HFCs have a combined loan portfolio of Rs 1,000 crore. Growing at 100-300 per cent per annum, they have near-zero non-performing assets (NPA). The number of players is growing and so is the geographic coverage of each player

Encouraging The Private Sector
The government is becoming increasingly cognisant of the role the private sector can play in addressing the housing needs of low-income families. A number of government initiatives at the Centre (like Affordable Housing Task Force recommendations), state (Rajasthan and Orissa’s affordable housing policies) and urban local body level have taken steps to incentivise the private sector to create housing for the urban poor. They have used various supply-side interventions, including mandating reservations, providing subsidies (extra floor space index, reduced taxes), faster approvals and earmarking land for low-income group housing. The government has also introduced demand-side interventions for beneficiaries, including interest rate subsidy and reduced taxes (stamp duty, registration, etc.).

The greater the number of beneficiaries served by the private sector, the lower is the burden on the government and the incidence of new slums. This way cities can soon become ‘slum-free’.

Poor Man’s Dream
The report further shows that low-income customers are happy with their new homes. Improved living conditions, secure neighbourhoods, bigger homes and better utilities are some of the functional benefits cited by them. The houses have also had a positive psychological impact on people. They felt a sense of upgradation, a feeling of belonging,
pride of ownership and a surge in aspirations.

Lack of clarity on maintenance responsibilities, longer commutes to workplaces and increased cost of living were some of the challenges cited by customers, but for most of them it was a dream come true.

Private Sector’s Limitations
The LIH market — housing and housing finance — has grown manifold. Yet, the gap between the current supply and the estimated demand is significant. For a potential need of 13-15 million units for households that earn between Rs 10,000-25,000 per month, so far 78,000 LIH units have been launched as per our records.

The top three challenges cited by LIH developers are rising land prices, construction costs and long approval timelines. Limited access to debt and high cost of debt are the two key challenges cited by HFCs. The affordability of low-income customers has to be improved so more families
can be a part of this growing market.

Empowering LIGs

The government can create a conducive environment to enable millions of low-income customers to buy a pucca house. It can ensure faster approvals, develop infrastructure to increase supply of affordable and serviced land, ensure conducive regulation that directs housing companies to treat debt to low-income customers as priority sector lending (and thereby address the access and cost concerns of the housing finance companies) and reduce stamp duty and registration taxes for the end-customer, among other things.

In a private sector-driven market, where the developer determines the price, any subsidy given to the developer may not be passed on to the beneficiary. If subsidies are to be provided — and they should be provided to enable more low-income families to buy private-sector-led housing — they should be given directly to customers. A good example of this is the interest rate subsidy provided to low-income group customers (a 5 per cent interest rate subsidy on loans up to Rs 5 lakh) by the government.

What The Government Needs To Do?
While foreign direct investment has been relaxed, most of the development seen in this sector is by small developers who typically do not have access to these funds. The sum of Rs 4,000 crore that has been offered to National Housing Bank should help reduce the cost of home financing, but first the supply of housing has to be upped. While the recent announcements signal good intent, their impact could be limited. The government needs to be more active about creating an enabling environment — as described above — to help realise the dreams of millions of low-income Indian families.

Jain, Agarwal and Karamchandani are with Monitor Inclusive Markets, a unit of Deloitte

(This story was published in BW | Businessworld Issue Dated 08-09-2014)

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