Opinion The real reason middle class Indians can’t afford to buy homes — and how to make sure they can

The first step in improving affordability is to release land supply in a planned and transparent manner. This will increase competition and put pressure on prices

Shishir Gupta

Nandini Agnihotri

Annie George

March 8, 2024 03:39 PM IST First published on: Feb 21, 2024 at 07:55 AM IST

In her budget speech on February 1, the Finance Minister mentioned two housing schemes. First, under PMAY-Grameen, “two crore more houses will be taken up in the next five years”. Second, the government will launch a scheme to help “sections of the middle class living in rented houses, or slums, or chawls and unauthorised colonies to buy or build their own houses”. State intervention in terms of housing subsidies can be justified for economically poor households if the objective is to give them house ownership, since the market can’t deliver housing at a price point that they can afford. However, for middle-income groups, the proposed scheme should focus on increasing the affordability of housing, rather than providing subsidies to them since housing is expensive in India.

The government’s intent in announcing this housing scheme for the middle class is laudable since access to housing is a prerequisite for a dignified life. According to the latest available Census data of 2011, 17 per cent of all urban households in India live in slums. The situation is especially grave in India’s bigger cities — 41 per cent of households in Greater Mumbai, 30 per cent in Kolkata, and 29 per cent in Chennai live in slums. Housing affordability remains elusive, despite attempts by successive governments to address the problem. This begs a fundamental question: How expensive is housing really in India, and why? Answering this will provide clarity on how to tackle this challenge, especially in light of the proposed housing scheme for the middle-class.

Housing in India is indeed expensive relative to its yardstick of affordability. At an average price-to-income ratio (PTI) of 11 — that is, years of income required for an average household to buy a 90 square metre apartment — it is more than twice as expensive as its affordability benchmark of 5. While housing in countries like the US, Australia, and Germany is more affordable, several other countries, especially in the developing world, such as Bangladesh, Sri Lanka, and China have PTIs that are worse than India’s.

Probable causes of spike in house prices

There could be two reasons for high house prices — a runaway increase in prices over time, and/or higher base prices due to structural reasons. We argue in our working paper “House Prices in India: How High, and for How Long?” that the latter is the primary cause of this high house price phenomenon, and hence the resolution will require reforming the land markets. This will improve transparency in the real estate sector, making it more competitive and improving affordability.

House prices have appreciated by 9.3 per cent on an annual basis between 1991–2021, which is similar to gold at 9.2 per cent, but lower than the Sensex and nominal income growth at 13.5 per cent and 12.5 per cent respectively. This profile of returns across assets is consistent with that in other countries. Thus, housing in India is not expensive due to a supernormal price increase over the past few decades, and hence it must be due to structural reasons.

Housing affordability moves in tandem with the degree of “transparency” in the real estate industry; one helpful measure of this is the transparency index computed by the real estate consulting firm Jones Lang LaSalle (JLL). The average PTI for countries with a “highly transparent” real estate industry is 8, and 14 for countries with “low transparency”. Despite being one of the best improvers in the Asia-Pacific region over the last few years as a result of reforms like RERA and digitisation of land records, India is still ranked within the “semi- transparent” cohort. A key reason for this is the lack of credible and rigorous land use planning and implementation, which leads to constrained and unpredictable supply of land. Only 28 per cent of Indian cities have approved master plans, almost none of which are detailed enough or contain the requisite financing and sequencing for key plan proposals. This absence of granularity and concomitant financing makes it uncertain if the city will actually develop according to the plan and by what timeline. In contrast, Singapore’s 40–50 years concept plan is broken down into 20–year, plot-by-plot development plans with identified sequencing of projects and broad financing strategies.

This semi-transparent milieu makes the entry of new real estate developers difficult, giving rise to a less-than-competitive industry structure. Compared to other industries, real estate in India has a significant number of firms making supernormal profits (of more than 20 per cent) in the long run. Since profitability in real estate is driven largely by prices, the ability of some developers to make significantly higher profits must be due to their ability to command a “premium”, which could be due to a host of factors like their credibility, reputation, and access to parcels of land with infrastructure connectivity. The advantages from access to good parcels of land become even more critical when land supply is constrained. A less-than-competitive real estate industry operating in a semi-transparent environment also incentivises people, especially those with unaccounted income, to invest in real estate, reinforcing this high price structure. It is not a coincidence that 77 per cent of India’s household wealth is stored in real estate compared to 62 per cent for China, 44 per cent for the US, and 37 per cent for Germany.

The first step in improving affordability, thus, is to release land supply in a planned and transparent manner. This will increase competition and put pressure on prices, in turn improving affordability. Not only will this provide a large segment of Indians with access to decent housing, but in the process will also boost GDP growth and create much-needed non-farm employment. Government schemes have usually aimed to make housing affordable by focusing on increasing housing stock through subsidies, rather than addressing the root cause by credibly unlocking land supply. As we embark on a new housing scheme, we would be well-advised to take a holistic view of the issue so the resolution is targeted and efficient.

Gupta is Senior Fellow, Agnihotri is Research Analyst and George is Research Assistant at Centre for Social and Economic Progress, Delhi