Affordability of ‘Affordable Housing’

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The allure of homeownership has always been strong in India, particularly for the burgeoning middle class. However, the real estate landscape has undergone a significant shift. Soaring property prices have pushed the dream of owning a home further out of reach for many.

This is the problem that the ‘Affordable Housing’ segment was supposed to solve with promising budget-friendly options. And even though we see real estate projects selling out on launch days, is this segment truly affordable, or is it a shrinking mirage?

Shrinking value proposition

Private developers introduced "affordable housing" units as typically smaller and situated in developing areas. Incentives like tax breaks made this segment attractive to build. However, achieving ‘true affordability’ remains a challenge primarily due to the following factors:

• Shrinking apartment sizes: To maintain a lower price tag, average apartment sizes in the affordable housing segment have shrunk considerably. For instance, the average size of an affordable apartment in a tier-1 city like Mumbai has dipped to around 500 sq. ft., raising concerns about long-term livability for growing families.
• Location and its costs: These projects are often located in peripheral areas with limited access to established infrastructure like schools, hospitals, and public transport. While the purchase price might be tempting (say, around ?40-45 lakh), the long-term costs associated with daily commutes and potentially higher living expenses in these areas erode the affordability benefit.
• Quality concerns: The pressure to maintain a lower price point can sometimes lead to compromises in construction quality. This can manifest in the use of lower-grade materials or shortcuts in construction methods, potentially impacting the long-term durability of the building.

The math isn’t 'mathing'

Let’s run a few back-of-the-envelope calculations:

• Median income: As of FY2023, India's median household income in urban areas is estimated to be around ?21,647 per month.
• Affordability ratio: Commonly used affordability metrics suggest that housing costs should not exceed 30% of gross household income. Applying this to the median income, a truly affordable home's EMI should ideally be under ?6,500.

Considering the average price point of ?40 lakh for an affordable housing unit and current loan interest rates (around 8%), the EMI for a 15-year tenure would be closer to ?40,000, significantly exceeding the affordability threshold for a large portion of the middle class.

There is more to affordability

Let’s, for the sake of convenience, consider a buyer well above the median income. Even in that case, a lot more should go into affordability considerations than just the base price.

• Hidden costs: Factor in additional expenses like stamp duty, registration fees, and maintenance charges. Even the amenities offered by the project can also significantly impact long-term costs.
• Hidden delays: Projects categorised as "affordable" are more likely to face delays due to approvals or financial constraints, disrupting financial planning and adding to the overall cost burden.
• Investment potential: While affordability is a primary concern, consider the property's potential for long-term value appreciation. Investing in a well-connected area with good growth prospects would offer better returns in the future.

The road to ‘true affordability’

The challenge of achieving true affordability in private-sector "affordable housing" will require a multi-pronged approach. Developers will need to prioritise quality and responsible pricing. Homebuyers will have to be well-informed and make calculated decisions. Ultimately, only a collaborative effort with the government's involvement in infrastructure development can bring us closer to the goal of making homeownership a reality for a wider segment of India's middle class.