Saturday, October 4, 2014

The challenge with market-driven supply of affordable housing

The Union Housing and Urban Poverty Alleviation Ministry has estimated urban housing shortage for the Twelfth Plan period (2012-17) at 18.78 m, of which 96% will be in the EWS/LIG categories. As I have already blogged here, here, and here, none of the strategies currently being pursued to encourage market-based supply of these units are likely to bear fruit.

The Government of India has been implementing various programs - JNNURM, RAY, Affordable Housing in Partnership (AHP), Rajiv Rin Yojana (RRY), Credit Risk Guarantee Fund Scheme (CRGFS) etc - to increase EWS/LIG housing stock by public construction or market-based supply through various kinds of incentives.

Under the AHP scheme, the GoI would provide a subsidy of Rs 75000 per unit for both housing and internal infrastructure for units with carpet area below 40 sqm (430 sq ft) in projects with atleast 250 dwelling units. The RRY scheme mandates a 5 per cent interest subsidy for loans upto Rs 5 lakh for EWS/LIG applicants for units below 40 sqm. The CRGFS provides for credit guarantee, to an extent of 85-90%, for loans upto Rs 5 lakhs and units below 40 sqm, thereby enabling lending without collateral.

The government mandates units below 60 sqm as affordable housing, and people with annual incomes below Rs 1 lakh as EWS and Rs 1-2 lakh as LIG. All the aforementioned incentives are confined to houses with carpet area below 40 sqm. In simple terms, only people with incomes below Rs 2 lakh, purchasing houses below 40 sqm, and at a cost of less than Rs 5 lakh, can avail of these incentives and benefits.

I am inclined to believe that this eligibility criteria leaves us with a very small sub-set, approximating a null set. Consider this. Why would someone with annual income of Rs 2 lakh want to pay a mortgage of Rs 5500 a month to purchase a 430 sqft house for about Rs 5 lakh when he can get a 800 sq ft house on rent for less than half the mortgage amount? All the more so since their income is most likely to go up and they would want a house larger than 430 sq ft as children grow up. Similarly, it may be a stretch to expect a person with an annual income of less than Rs 1 lakh to be able to afford a monthly mortgage payment of about Rs 1500 to acquire a 250 sqft house. The differential with rental housing applies here too. Further, including all the subsidies and incentives, a 250 sq ft house cannot come any cheaper than Rs 3 lakh in even the suburbs of any Indian city. Finally, it is also important to realize that the overwhelming majority of affordable housing requirement would be for those with incomes far below Rs 1 lakh.        

None of the schemes outline the pricing strategy for the houses for EWS/LIG except vague assertions of "no-profit-no-loss basis" and "open and transparent process". No state has anything like a satisfactory price fixation mechanism. This should come as no surprise since the large variability in land (especially) and construction costs make it is very difficult to have an administered price for privately developed housing units.

Even assuming we surmount the challenge of fixing a price, that of identifying the beneficiaries will remain. It may be unreasonable to assume that the government can allot a relatively valuable asset like an urban housing unit in a transparent and fair manner, given the massive and exploding demand for such housing and the limited supply that is likely to materialize from the market-based incentives.

The mandates driven policies (reserving a share of units in any development for EWS/LIG housing) too are not likely to be any more effective in increasing supply. Such policies have been operation in many Indian states for years, with negligible addition to the stock. The land premium in the price of EWS/LIG units in such areas makes them prohibitively expensive and even an unlikely EWS/LIG purchaser is most likely to dispose off his unit at the earliest opportunity. It is no surprise that the only places where mandates have generated some stock, they are being sold as studio-suites.

Finally, these policies adopt a very restrictive definition of affordable housing. Though I have not been able to get supporting data, there are many reasons to believe that the price-to-rent and price-to-income ratios for housing are likely to be very high, even for those in the middle-class category, as to make home ownership unaffordable and unattractive.

In view of all the above, it is reasonable to argue that while we should persist with incentives and mandates, any realistic dent on meeting the EWS/LIG demand may have to come predominantly from public housing projects. A pure public procurement driven model may not be appropriate given the associated inefficiencies. Therefore, the government may have to cough up a much larger share of the construction cost as well as provide land, while the construction and maintenance of such projects should be entrusted to private agencies through incentive-compatible contracts.  

1 comment:

Sridhar said...

In theory markets can respond to the EWS/LIG housing needs if the government can subsidize the land cost. In order for this subsidized land not to be diverted for other lucrative real estate opportunities, the govt needs to stipulate in strictest, enforceable terms the carpet area and amenities available for such housing units making them less attractive to higher income groups. But the possibility of untargeted higher income groups taking interest and bidding up the prices is very likely. For subsidized projects like these to work, the trick is to ensure that the housing needs of all the income segments be addressed concurrently for any arbitration to not exist.