Affordable Reality

A simple definition for affordability can be the consumers ability to purchase. However,this is a relative term. The idea of affordability may vary from individual to individual as well as from place to place. For example,what is considered affordable to a home seeker in Pune may not be affordable to someone else in Mumbai. With the common man read middle-class segment constituting nearly 70 per cent of the demand for housing,we shall keep our understanding of affordability limited to that which is deduced by the aam aadmi.

Affordable housing refers to residential units offered by developers at prices that are within the budget of low- and middle-income groups of a society. The housing units should also have all the basic amenities to cater to the daily needs of the household. Monthly carrying costs of an affordable home should not exceed 30 per cent of the household gross income. Affordability is quantified by household income and price of the product.

GOVERNMENT INITIATIVES

With demand for affordable housing being as high as it is,the term has become the governments new mantra. Through its Bharat Nirman programme,the government plans to double the construction of low-cost houses to 12 million units from the present target of six million units. The Central government has also taken initiatives to encourage states for the release of land needed for the construction of affordable homes. Also,steps have been taken by the government to initiate public private partnerships and step up funding of rural housing.

Maharashtra had declared 2009 as the year of Housing for the Common Man,with a plan to build one million affordable homes. Meanwhile,in the national capital of Delhi,the government has held a lottery for 5,000 flats. But its not just the government,real estate developers and investors are also increasingly looking at investment in affordable housing.

DEMAND GROWTH

With the ever-increasing urban population,demand for affordable housing is witnessing a constant rise. According to recent a Planning Commission report,the shortage in urban housing as on March 2007 was estimated ar around 24.71 million. The report went on to say that this shortage would to 26.5 million by 2012. Ninety nine per cent of this shortfall comes from the

economically weaker sections EWS and low-income groups LIG.

With real estate players witnessing a credit crisis,several of their big projects have come to a halt. Considering the huge demand in the affordable housing segment which is relatively insulated developers have now increased their focus on the fortune at the bottom of the pyramid. An estimated 450 new projects have been launched,or are expected to be launched,in the affordable housing sector from big and small developers across the country.

PROBLEM AREAS

The three major problems faced by developers and home seekers are availability of land for housing,availability of flats that are affordable,and,availability of bank finance. In addition,real estate developers have resorted to a variety of ways to reduce the cost of projects by reducing the area of flats,slightly reducing the specifications of units and cutting down on luxury features. In several instances,there is no actual reduction on the real value of the flat. Discounts are often offset by other expenses that the buyer is forced to incur when taking possession of the flat. Each of the problems is discussed in detail below.

Loss of funds: There are severe fund leakages that take place due to changing of hands from Center to state to local administration. The final consumer either does not get anything or gets only a part of what is due to him. By some estimates,from 2007 to 2009,HUDCO has given loans worth over Rs 4,000 crore. These were primarily given to the EWS,which comprise 92 per cent of its customer base.

In spite of spending large amounts,the urban poor still do not have proper houses given the rampant leakages during project execution.

Lack of financing: Even as banks and housing finance companies HFCs want to lend,transaction costs remain very high. Further,they charge higher interest rates to commensurate the risks. Currently most microfinance institutions have short-term money in the tenor of three to four years at a rate of 15-17 per cent,which could translate into loans at the rate of about 18-19 per cent. This is still quite high for low-income individuals.

Low supply: Over the years,demand has been outstripping supply. This is shown in the table Demand outstrips Supply.

REALISTIC FUTURE

The number of families earning more than Rs 2 lakh annually is set to double to around 20 million in the next two years. This is definitely going to increase demand for affordable housing. To make affordable housing a reality for the common man prices will need to become more realistic.

Land cost will have to become lower. Further,there is a need to reduce construction costs for developers without,naturally, compromising on the quality of housing. If these and other issues are resolved,the dream of having a home could actually be realised by the aam aadmi. l

The writer is CEO,BankBazaar.com