The provision of affordable housing requires policy action at multiple levels to reduce land and construction costs and increase supply. This post proposes a policy mix for state governments in India to lower housing costs in their urban centres.
Historically central and state governments have pursued a siloed approach to housing. The government's focus has been to increase supply by providing free or concessional land, subsidies, and/or interest subsidies to individual households. There are hard fiscal limits to such efforts. A few state and urban local governments have occasionally tried some very limited schemes involving urban planning relaxations.
However, there has been no comprehensive scheme that brings together all possible policy levers to reduce costs and expand supply in a manner that genuinely promotes affordable housing sustainably.
Since the land extents are fixed and limited, meaningful expansion of housing supply can happen only by relaxing floor area ratios (FARs) and going up vertically. Since statutory charges and taxes on land and construction form about 40-50% of the total construction cost, any effort at expanding the supply of affordable housing requires reducing them significantly. Even with all these enablers, there will be market and co-ordination failures for several reasons. Market failures will require some light touch and simple regulation. Coordination failure requires proactive engagement with builders and ease of doing business in the industry. Finally, all these must be complemented by facilitating households’ access to bank loans, thereby creating a deep mortgage finance market.
Fortunately, state and city governments in India have the policy levers and institutional mechanisms to engage on the problem holistically.
The instruments available in theory to the government to encourage affordable housing are the FAR, land registration fees, statutory charges (layout development fees, betterment fees, building permission fees), property tax, linkage with bank loans and the interest subvention subsidy under the Credit Linked Subsidy Scheme (CLSS) (3%-6.5% for MIG/LIG/EWS), and land.
Governments need to provide significant enough relaxations on the building regulations to at least partially offset the high land cost and lower the total cost of affordable housing construction. This can come in the form of higher FAR and height limits, lower setbacks, and relaxations on minimum plot and road-width sizes (the current sizes are very large in many states). These relaxations allow developers to provide more units on the same land extent.
In this context, a landmark reform would be to adopt a policy that associates a building right (in terms of FAR) with a property ownership right. The landowner would have to buy the additional FAR beyond the building right, to the total FAR extent permitted by the Master Plan in that area. I have co-written here on this. This policy allows governments to use FAR as an instrument of revenue mobilisation and for formulating policies like those on transportation and affordable housing.
In this context, it’s to be borne in mind that Mumbai with a base FAR of 1-1.33 and purchasable FAR of 0.67-1, raises nearly Rs 6000 Cr each year from outright sales of FAR. In the new Andhra Pradesh capital city region, Amaravati, section 210.5 of AMRDA Zoning Regulations says that “wherever FSI exceeds 1.75, the applicant has to pay impact fee as levied by APCRDA from time to time”.
The state government could come up with an affordable housing scheme that would either directly offer or enable access to the following
1. Higher FAR, either free or at low purchasable rates
2. Reduction in land registration fees
3. Reduction in statutory charges
4. Lower property taxes for the first 5-10 years.
5. Linkage with banks to avail of housing loans and the interest subvention subsidy under the CLSS.
The exact details or extent of the benefits given under each instrument should be worked out. It should be left to the city governments to tweak the extent of benefits but with an upper limit on how much benefit can be given (if only to provide guidance and ensure some discipline among them).
Public land at concessional rates should be used only as a last resort. Given the limited extent of such lands, it’s not a sustainable policy to generate an affordable housing supply.
The Real Estate Regulation Authority (RERA) provides the ideal institutional platform for the implementation of such projects. The state government could establish its own applications portal that links the RERA portal, and the websites of the municipal governments and banks by using APIs to facilitate seamless processing of applications to avail benefits under the scheme.
The scheme could be two-tiered – one with more generous benefits for housing units up to 600 sq ft and slightly less so for those up to 900 sq ft. Some light-touch income qualifications could be kept to eliminate egregious abuse.
The RERA could fix a reasonable city-wide upper limit for each category. This rate could be the same for all cities, or cities could be grouped into 2-3 categories and a rate fixed for each or determined separately for each city (for the larger ones). While some might be considered too invasive, it’s common across the utilities sector. In housing too, Singapore’s lessee-occupied public housing is a good example of a cost-plus-regulated housing market. And the very nature of the housing market dictates that it cannot avoid some form of price regulation.
The state government could announce an affordable housing scheme that offers all these benefits for the buyers of RERA-registered affordable housing apartments. The housing departments/units of the state and municipal government could work together to facilitate apartment buyers’ access to bank loans and the CLSS subsidy. The state and local governments could work with banks to get them on board the scheme and mitigate any concerns arising from previous bad experiences with such governments. The Government of India should consider expanding and extending the duration of the credit-linked subsidy scheme.
This would be one of the less fiscally burdensome (at least in terms of current fiscal expenditure, though not in terms of revenues foregone) policies possible to meaningfully address a problem like the affordable housing shortage.
To make it politically attractive, all the benefits would be wrapped together in one bundle, their monetary value captured, and delivered as a package to all affordable housing beneficiaries. It’s also essential to ensure that there’s no political economy-related moral hazard among mortgage holders from the government’s involvement in the scheme. One way to mitigate it is to avoid any direct involvement between the government and the apartment buyers, and confine government facilitation to developers and banks.
The challenge will be to get builders and developers to pass through the benefits of this package to buyers. In markets where the demand for such housing far outstrips supply by orders of magnitude and the market itself is prone to and rife with abusive practices, some amount of regulation in this regard is essential. Over time, if the scheme creates its supply, there will be pass-through at a steady state.
The administration of a scheme like this requires good-quality data. There should be baseline data on the construction costs and market prices of both affordable and regular housing. The value of the benefits provided should be monetised as reference data (the applications portal could show this value for each applicant). This data should be collected periodically, analysed, and used appropriately for decision-support on the scheme. This analysis will help determine the extent of pass-through in affordable housing.
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