The Growing Challenges of Affordable Housing in India

In recent times, the affordable housing segment in India has faced significant challenges, impacting both homebuyers and the broader real estate market. A recent study sheds light on the mounting desolation in the sector, as the share of affordable housing in overall sales has witnessed a substantial decline in H1 2023 compared to the previous year. Furthermore, the rising interest rates on home loans have made it even more challenging for buyers to enter the market. This article will delve into the urgent need for policy interventions to support the affordable housing segment in India.

1. Shrinking Share of Affordable Housing:

The share of affordable housing in overall sales during H1 2023 has seen a steep decline, dropping to approximately 20%. This represents an alarming 11% decrease compared to the same period in 2022. Even in the top 7 cities of India, the share of affordable housing in the overall housing supply has plummeted to just 18% during H1 2023, down from 23% in H1 2022. This worrisome trend calls for immediate attention from policymakers to address the challenges faced by this crucial segment.

1. Escalating EMIs for Affordable Homebuyers:

The mounting burden on affordable homebuyers is further compounded by the significant increase in Equated Monthly Installments (EMIs) over the last two years. The floating interest rates for home loans up to INR 30 lakhs have surged from 6.7% in mid-2021 to nearly 9.15% in H1 2023. This has resulted in a staggering 20% increase in the EMIs for borrowers, leading to a substantial jump in the overall interest component. For instance, home loan borrowers who were paying an EMI of approximately INR 22,700 in July 2021 are now paying around INR 27,300 per month, an increase of nearly INR 4,600.

1. Interest on Home Loans Exceeding Principal:

One of the most concerning consequences of the rising interest rates is that homebuyers' EMI payments are primarily going towards interest rather than the principal amount. This situation hampers the accumulation of equity and delays the process of homeownership. Additionally, it reduces the opportunities for benefiting from property appreciation if the buyers decide to sell the property, as a significant portion of the principal remains unpaid.

1. The Impact on Sales Numbers:

The dwindling share of affordable homes in the housing market has had a direct impact on the overall sales numbers across the top 7 cities. The total sales share of affordable homes fell to approximately 20% in H1 2023, down from 31% in the corresponding period in 2022.

1. Government's Role and Vision of Housing for All:

To achieve the vision of Housing for All, the government must prioritize making affordable housing more viable for a larger number of buyers. The demand for affordable homes in the country is significant, as these homes priced below INR 40 lakhs account for over 80% of the current urban housing shortage of approximately 11.2 million units. Policy interventions and supportive measures are crucial to ensure the sustainable growth of this crucial segment in the real estate market.

The challenges faced by the affordable housing segment in India are pressing and require urgent attention from policymakers. The shrinking share of affordable housing in overall sales, coupled with the burden of rising interest rates on home loans, necessitates focused policy interventions. To fulfill the vision of Housing for All, the government must implement measures that make affordable housing more viable for a larger number of buyers. Addressing these challenges will not only benefit individual borrowers but also play a pivotal role in reviving the broader housing market in the country.

In addition to these issues, the current definition of affordable housing set by the government has become a major obstacle in metropolitan cities like Mumbai, where finding affordable homes meeting the criteria is nearly impossible. The segment is in need for a revised definition of affordable housing that addresses the unique challenges faced by metropolitan areas and fosters inclusive urban development. According to the current government definition, affordable housing is characterized by properties with a price cap of INR 45 lakhs and an area not exceeding 60 sq. m. While this definition may be applicable in certain regions, it falls short when it comes to metropolitan cities like Mumbai. The limited availability of land and high-cost premiums paid to the ULB in such cities make it practically impossible for developers to offer homes within the stipulated price cap and area constraints, leaving the majority of potential homebuyers excluded from the affordable housing segment.

To promote affordable housing in metropolitan cities and support the vision of Housing for All, it is imperative for the government to rethink the existing definition. One crucial aspect of the revised definition should be the removal of the price cap, as this arbitrary limitation hinders the development of affordable homes in high-demand urban centers. Additionally, restricting the area limit to 60 sq. m. is unrealistic, considering the diverse needs of urban households and the scarcity of available land.