Financial Services News

Why is India’s affordable housing market shrinking?


Affordable housing, once considered a sunrise segment of the real estate sector following the Union Government’s promise of “Housing for All” in 2015 and subsequent subsidies under the Prime Minister Awas Yojana has witnessed one of the starkest declines in demand and supply over the past three years mainly in India’s urban areas.

According to developers the present definition of affordable housing make it unviable for them to supply such homes. The government defines affordable housing as residential units that are 60 square metres at, or under ₹45 lakhs in “metro areas”. Metro areas are, Mumbai, Delhi National Capital Region (NCR), Chennai, Bengaluru, Hyderabad, Kolkata, Kochi, Pune and Ahmedabad. All other urban agglomerations are categorised as “non-metro markets,” distinguishing them from rural real estate. The size of an affordable housing unit is up to 90 square metres in non-metro markets, yet must be priced at, or under ₹45 lakhs.

Developers cite steep increases in land value, direct and indirect taxes, construction materials and other input costs for their inability to supply affordable housing. “As a result, almost none of the projects in the metros can take the benefit of provisions of affordable housing such as Section 80IBA,” said Kapil Gandhi, Managing Director, Sigma One Universal, a Pune-based real estate company. “Of every ₹100 invested in real estate, 35% to 45% goes directly to the government, which includes heavy premiums, direct and indirect taxes, and GST. Sometimes these do not come with a set-off and other costs. So a good property can not cost less than ₹65-75 lakh in any metro,” Mr Gandhi said.

While factors like consumer enthusiasm for home ownership, rising incomes and an urban housing shortage of approximately 3 crore has led to the strong housing sales momentum that India is witnessing today, Vivek Rathi, National Director Research, at Knight Frank India, another builder said a majority of this demand lies in the affordable housing segment, but the supply has been declining over the past two years, he said.

“The increase in home loan interest rate during this period has shrunk house purchase affordability by 15% across all consumer segments. To fund the same house it requires enhanced financial contribution from the consumer. However, the consumer in the lower income segment finds it particularly challenging to increase their initial contribution or downpayment to fund the enhanced mortgage requirements,” said, Mr. Rathi. While the Reserve Bank of India has not increased its basis points in the past four months, bank home loan interest rates have gone up from 7% to almost 9% in under a year.

“Besides, increase in housing prices across the country, the lower income segment is both price sensitive and heavily mortgage dependent. The share of upto ₹50 lakh value houses in sales across the top 8 cities shrunk from 54% in 2018 to 32% in H1 2023,” Mr. Rathi pointed out.

Sector stakeholders suggest measures like subsidies, pubic private partnerships, timely completion of transit housing projects and enhanced credit flow to rekindle demand in this segment. Anuj Puri, Chairman, Anarock Group said, “The demand for affordable housing remained lacklustre in H1 2023 and this trend may continue in H2 2023 as well… The fact remains that affordable housing suffered the greatest impact of the Covid-19 pandemic – and unlike the other segments, it has not recovered in the last two years. With buyers of this segment postponing purchase decisions, affordable housing sales are languishing, and developers have accordingly curtailed its supply,” Mr. Puri said.

According to ANAROCK Research, the supply share of affordable housing came down even further to approximately 18% in Q3 2023, against 24% in the corresponding period in 2021.

“If we look further back to the pre-covid period, this segment’s supply share in Q3 2019 was 41%. This decline in the share of supply is largely due to its demand shrinking post pandemic,” Mr. Puri said.

During the last Union Budget an association of real estate suggested that the price cap of this segment be raised to ₹75 lakh for non-metro cities and ₹1.50 crore for metros. They also sought to increase the ‘unit with carpet area’ size for this housing segment under Real Estate Regulation Act to 90 square metres in the metros and 120 square meter in non-metros, an increase of 30 square metres across the board.

“In 80% of non-metro cities the price of the house for carpet area is about ₹5,000 per sq ft. This puts the price of a home at ₹48 lakh, thereby disqualifying it from the benefits of affordable housing,” Mr. Gandhi of Sigma One Universal said. “Even in the peripheral areas in metros the price is about ₹7,500 per sq ft, which again exceeds the ₹45 lakh mark of ‘affordable housing,” he added.

While mass housing supplied by the various government-run state housing boards through the lottery system has declined significantly over the past three decades, they are still sought after by low income families in their attempts to own modest homes. But with the exponential rise of private property developers in the past two decades, who focus on “gated community projects”, mixed housing under housing boards like the Delhi Development Authority, which would have included “affordability”, has taken a beating.


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