In 2015, according to government estimates, about 40 million households faced housing shortage. The same year PMAY policy was launched to provide low cost housing. From 2015 to March 2021, 11.3 million houses were sanctioned and those completed under PMAY (Urban) were 4.8 million. A drop in the ocean if one must say!
It’s not as if, the need for affordable housing in the growing urban cities has not caught the attention of private developers. The segment also offers funding opportunities worth $0.62 trillion for private funds over the next five years. Then why the shortage?
Not only a very few private equity funds are dedicated to financing affordable homes, the housing market is fragmented and is influenced by various regulations, deterring the realty firms. Moreover, the costly land in urban areas have pushed up the ratio of house prices to annual income, reducing affordability, especially for low-income households.
Having said that, the government’s demand push, through grant of infrastructure status to affordable housing, Credit Linked Subsidy Scheme for MIG buyers and refinance of housing loans by NHB’s have boosted the morale of developers and buyers. RBI on its part, had raised the housing loan limits under the priority sector lending scheme to boost affordable housing.
DIFFERENT INCOMES DIFFERENT NEEDS
The Finance Ministry should relook the `one size fits all' approach to the affordable housing segment since mid-income and low income groups have different sets of challenges that need different suits of solutions.
Low Income Housing -There are between 26-37 million households living in informal housing. Also, overall affordability measured by the “house price to income” ratio or the “loan to income” ratio has worsened over the past 4 years (RBI).
As per experts, allowing households to self-construct through Beneficiary-led Construction (BLC) subsidy is cheaper than the projected PMAY-U investment. But, this would need a lot of handholding in the EWS space to ensure that families not only start construction of their home but also finish their homes on time.
Providing a package that includes apart from financial support, capacity building and impetus to indigenous housing technologies and practices for the EWS families could be the cost effective and efficient way of providing housing for low-income households.
Mid-Income Housing - In the mid-income housing segment, till March 2022 Under Section 80EEA of income tax law, first-time homebuyers could avail an additional tax deduction of Rs 1.50 lakh if the unit is worth up-to Rs 45 lakh. Such a borrower can also claim subsidy under the government Pradhan Mantri Awas Yojana Programme (PMAY). Not to mention, record low home loan interest rates too have been a great driver of home sales in this segment.
Not surprisingly, last year 43% of the total housing sales in India’s eight leading housing markets (Ahmedabad, Bangalore, Chennai, Hyderabad, Kolkata, Delhi-NCR, MMR and Pune) was within the price bracket of Rs 45 lakh, according to a report by PropTiger.Com, a cap essential to avail of government subsidies on home purchase.
As per the report, the up-to-Rs-45-lakh-price bracket also contributed 41% to the annual new supply in these eight markets in 2021. A total of 2.14 lakh units were launched in 2021 in these markets compared to 1.22 lakh units in the preceding year, showcasing an upward swing of 75%.
Tax rebates, stamp duty waivers, increasing the capping for homes to qualify as affordable homes in metro cities and a robust support from the financial institutions, especially NBFC and HFC are some of the ways that can incentivize homebuyers in mid-income segment.
THE BIG QUESTION: AFFORDABILITY?
In addition to large number of stalled housing projects across the country, the average house prices are estimated to be higher than the annual income especially in the metro cities. The situation has improved for the middle-income and higher middle-income segments and given the quantum of demand for 50-60Lakhs bracket, many projects are being planned for that ticket size. However, the better profit margins in luxury homes segment have led developers to favour large and luxury apartments.
The big question is what are the factors that are hurting housing affordability and will make owning a home a costlier proposition for the masses.
Transaction Cost: The circle rates or minimum rates for valuation of land and immovable properties in residential, commercial and industrial areas in many cities have increased. In Delhi NCR, some colonies have witnessed an increase by up to 30 per cent. The revision is bound to affect all residential colonies. Although, the market value of land in Delhi has gone up considerably in the past few years with infrastructure development, some colonies in fact need a correction where the circle rates are higher than the prevailing market rates.
Likewise, Ready Reckoner Rate or Circle Rate - a minimum rate of property transactions notified by the government have been hiked in Maharashtra from 31st March 2022. In Thane, Navi Mumbai, Pune, Panvel, and all the other municipalities the rates have increased by an average of 8.80%.
In Thane, the rates have been increased by 9.48 percent, Navi Mumbai by 8.90 percent, Panvel by 9.24 percent, Pune by 6.12 percent, Pimpri Chinchwad by 12.36 percent and Nasik by 12.15 percent. The increase in property price increases taxation prices for both seller and buyer.
Hyderabad’s circle rates or guidance value - the minimum amount at which a property transaction can be registered formally, has increased by 20% to 50% for different localities with effect from 1st February 2022. After the new rates become effective, the registration of properties can go up by Rs. 5 Lakh. Also, the revised ready reckoner rate for Hyderabad is fixed at Rs 75,000 for agricultural land per acre and Rs 1,000 for a flat per square ft. basis.
Property owners in new Gurugram, will now have to shell out 2% more of the property cost for registration of their properties. The Maharashtra government has increased the stamp duty on house registration by 1 per cent from April 2022 as a Metro Cess. With this addition, Mumbai’s overall stamp duty charges would increase to six per cent while in Pune it would reach seven per cent. The increased burden of Cess is bound to make even low ticket size housing out of reach for many a mid-income households.
On the other hand, West Bengal state government has extended exemption of 2% rebate on stamp duty and 10% rebate on circle rate of land/property till September 30, 2022. The 10% circle rate reduction would also reduce the GST burden. These measures have ensured that housing affordability continues especially for the 45 – 50 lakhs segment homebuyers. Karnataka government too plans to extend 10% reduction in property guidance value for next three months till 31st June 2022 which would be a good news for the homebuyers.
Material Price Hike: The construction materials account for about 2/3rd share in the total cost of construction and the prices of key raw materials have gone up between 20% and 70 percent in the last year. As a result, the residential property prices have shot up by 5% - 12% across the country mainly due to the unprecedented spike in raw material price particularly steel, besides aluminium and cement and fuel prices adding to cost of construction. India's top eight real estate markets have all witnessed a rise in the average capital values of residential properties, shows data from Knigh Frank India.
Credai-MCHI said housing prices could go up by 10-15% April onwards due to sharp increase of Rs400- 600 per square feet in construction costs with rising inflation in key commodities like steel, cement, among others.
The developers have started reviewing their pricing strategy and are passing on the hike to the buyers. The affordable housing projects especially, are in a Catch 22 situation as they have lower profit margin compared to other segments
and are finding it difficult to absorb the price rise, but if they increase the prices, it would see drop in sales.
One of the urgent step the government could consider is the controlling of essential construction materials price, reducing GST rates and allowing input tax credit (ITC) to developers. Gradual reduction in steel exports which has seen the steepest hike and extending the tax-saving option of section 80-IB to the affordable housing category could be the additional recourses.
Tax Incentive Withdrawal: One of the major reasons for record property registrations in 2020-2021 in key cities despite the pandemic was the developer discounts, low interest rates, stamp duty cuts and income tax deductions.
Till now, the homeowners could avail the deduction on account of home loan interest up to ?2 Lakh under Section 24(b) of Income Tax Act, a tax benefit of up to Rs 1.5 lakh on the principal amount under Section 80C, additional deduction on home loan interest up to ?1.5 Lakh on house properties valued less than ?45 Lakh s under Section 80EEA and under section 80EE, deduction of Rs.50000 in respect of interest on housing loans to the first-time house owners who own a house of Rs.50 lakh or less and have taken the home loan amount of less than or equal to Rs.35 lakh.
Come April 1, homebuyers will be able to avail only two key deductions under Section 24 (b) and Section 80C of the Income Tax Act. This is because the government has not extended the tax-break for the upcoming financial year 2022-23 in Union Budget 2022. It was available for financial years 2019-2022. Incentives to homebuyers especially to the lower and mid income groups have been largely missing in the budget.
GST On Real Estate: Home buyers have to pay a Goods and Services Tax (GST) on the purchase of under-construction properties like flats, apartments and bungalows as well as developable plots. GST for affordable housing is at the rate of 1% for and 5% for non-affordable housing.
INADEQUATE DEFINITION OF AFFORDABLE HOUSING
The Ministry of Housing and Urban Poverty Alleviation of Government of India, defines affordable housing on the basis of area, location and price range.
- For the Economically weaker section (EWS), an affordable house would be a unit measuring between 300 sq ft and 500 sq ft (super built-up area), at a price tag below Rs 5 lakh for which a household has to pay Rs 4,000-5,000 in Equated Monthly Installment (EMI).
- For Low Income Groups (LIG), an affordable house would mean a unit measuring between 500 sq ft to 600 sq ft, in the price bracket of Rs 7 lakh - Rs 12 lakh for which a household might pay around Rs 5,000-10,000 in EMI.
- For Mid Income Group (MIG) citizens, an affordable house comprises of a housing unit measuring between 600 sq ft to 1,200 sq ft, priced between Rs 12 lakh to Rs 50 lakh for which a household may have to pay approximately Rs 10,000-30,000 in EMI.
Broadly, the current definition of affordable housing includes RERA carpet area of up to 90 sq m in non-metropolitan cities and 60 sq m in metropolitan cities and having a value of Rs 45 Lakh or both.
Notably most projects in metropolitan cities as defined by the Ministry i.e. Delhi-National Capital Region, Bengaluru, Chennai, Hyderabad, the Mumbai-Mumbai Metropolitan Region and Kolkata do not qualify as affordable housing projects due to the set threshold. Thus, most of the homebuyers can not avail the benefits such as, reduced GST and tax exemptions from such projects. An increase in the ticket size of affordable houses depending on locations considering the rise in asset prices and input costs would have been favourable for boosting housing affordability.
DROP IN AFFORDABLE HOUSING DEMAND
A major part of the government’s focus has been towards Housing for All and Pradhan Mantri Awas Yojana. More incentives and sops are required for the mid income housing segment as well, given that majority of homebuyers in India belong to this category - from middle class families to millennial first time homebuyers.
As per CII-ANAROCK Consumer Survey an under-10% increase in price rise has a moderate-to-low impact, but an increase of over 10% has a more profound repercussions on buyer sentiment. This is significant given that developer expect a price rise of 10- 15% in 2022.
WITH SOME STATE GOVERNMENT’S DECISION TO IMPLEMENT HIKE IN CIRCLE RATES AND STAMP DUTY, THE PROPERTY VALUES WILL UNDERGO A MAJOR APPRECIATION AND WILL IMPACT THE HOUSING SALES. THE HIGH LAND ACQUISITION AND TRANSACTION COST WILL PUT AN ADDITIONAL BURDEN ON PROSPECTIVE HOME BUYERS AND WILL CRUMBLE THE BUDGETS OF FIRST TIME HOMEBUYERS.
AS PER A RECENT SURVEY, OVER 50% OF ALL INDIA RESIDENTIAL LAUNCHES IN THE TOP 8 CITIES IN THE LAST FIVE YEARS HAVE BEEN IN THE SUB-RS 50 LAKH SEGMENT.
HOUSING PRICES ARE BEING PUSHED UP BY URBAN POPULATION GROWTH, HIGH CONSTRUCTION COSTS, VARIOUS ZONING AND OTHER REGULATIONS, FSI RESTRICTIONS IN MANY CITIES, DIFFICULTIES IN LAND ACQUISITION, HIGH LAND COSTS AND TRANSACTION COSTS, ESPECIALLY STAMP DUTY.