1. The Future of Affordable
Housing
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2. The Future of Affordable Housing
The past couple of years have witnessed
significant project launches in the affordable housing segment in India. One of
the major reasons is the global economic
slowdown pulling back developers from
high margin luxury segment to low
margin affordable segment due to volume sales and lesser investment. On the
demand front, rising disposable incomes
and growing urbanization have further
fuelled this growth. Micro financing has
helped the developers and consumers
avail easy finance without stringent KYC
norms of banking entities. Government
schemes too have supported the movement, especially for the EWS segment
through interest subsidies, tax benefits,
incentives to developers in the form of
higher FSI, subsidized loans among
others.
Affordable Housing - RNCOS Definition
Affordability is a relative term linked to
one’s income, expenditure, commitments
and savings. Different countries have
varying definitions of affordable housing
depending on their economic dynamics.
In true sense, affordable house is one
that provides adequate shelter and is in
line with one’s budget.
In India, various Government working
groups and independent agencies have
defined affordable housing on the basis
of house-hold incomes and size of the
homes. Affordable houses, as per RNCOS
comprise houses for Economically Weaker Sections (EWS), Lower Income Groups
(LIG) and Middle Income Groups (MIG).
Category
HH Income (P.A.)
Size (Super
Built Up Area)
EWS
< INR 1,50,000
Up to 300 Sq Ft
LIG
INR 1,50,000 3,00,000
300 - 600 Sq Ft
MIG
INR 3,00,000 10,00,000
600 - 1200 Sq Ft
Source: RNCOS
Basic Amenities
EMI/Rent
Sanitation, adequate
water supply and power
EMI does not
exceed 3040%
of gross
monthly
income of the
buyer
Provision of community
spaces and amenities
such as parks, schools
and hospitals

3. Urban Affordable Housing Shortage
As per census 2011, there is huge shortage of houses for the lower most category i.e. EWS. But the real opportunity
lies in the LIG housing where the finan-
cial risk of buyer is not high and proper
documentation is easily available.
Housing
Shortage
(Million)
Category
Monthly Per Capita Estimated No. of
Expenditure (INR)
HHs (2007)*
EWS
0-3,300
21.81
21.78
LIG
3,301-7,300
27.57
2.89
MIG
7,301-14,500
16.92
0.04
66.3
24.7
HIG
14,501 and above
Total
Source: Report of the Technical Group (11th Five Year Plan: 2007-12) on
Estimation of Urban Housing Shortage
*Distribution of 66.3 million households estimated from percentage of MPCE
classes in NSS 60th Round (Jan-Jun 2004) NSS Report No. 505

4. Breakup of Housing Shortage
11.70%
0.01%
0.15%
EWS
LIG
MIG
HIG
88.14%
Source: Report of the Technical Group (11th Five Year Plan: 2007-12) on
Estimation of Urban Housing Shortage
The growth in housing construction is directly
linked to the country’s macro economic performance. For every rupee invested in housing and
construction, 78 paisa gets added to the GDP.
Housing sector contributed 5% to India’s GDP
in 2012 which is further expected to rise to 6%
in 2013. The slowing pace of Indian economy
along with steep depreciation in rupee against
the US dollar has added to the woes.
Projections state that the Indian economy is
about to grow at a slow pace of 5-6% in next
five years. Real estate is under pressure. HIG
and luxury segment is losing focus. Financial
constraints pull developers towards affordable
segment (low margin, rapid sales)
Real GDP Growth
6.7%
6.4%
5.8%
The slowing pace of Indian economy along with steep depreciation in rupee against the US
dollar has added to the woes.
6.1%
3.3%
2011
2012
2013e
2014f
2015f
Source: Central Statistical Organization, EIU
Note: e/f = EIU Estimation/Forecast

5. Problems at Consumer Front
Inadequate Savings
• Majority income of LIG households spent
on food, non-food and house rent
expenses
• Disposable surplus is highly sensitive to
change in expenditure
Lack of Financial Awareness
• Low awareness about emergence of Micro
Housing Finance Companies/Self Help
Groups
• Inadequate information about Government
schemes meant for lower income housing
Problems at Legislative Front
Lengthy Approvals
• Approvals from nearly 40 departments in
central, state and local bodies
• Nearly 2 - 3 years for approvals and even
more leading to 25-30% cost escalation
Unclear Laws and Guidelines
• The building bylaws and rules for FSI, zoning and development plans lack clarity
• Overlapping guidelines for real estate
development
• Random modifications in regulations hamper the entire project planning
• Insufficient knowledge of financing options
and rationale to judge the most viable
option
Ever-Rising Cost of Construction
• Construction cost includes cost of cement,
steel, sand and labor
• Other costs comprise cost of land, registration, approval, developer’s margin etc.
• Steep price rise in raw materials and labor
(AAGR 2005-2012)
Cement - 10%
Steel - 20%
Sand and brick - over 100%

6. Initiatives to Spur Growth
Amendment in
Flagship
Schemes
Government has recently amended flagship scheme Rajiv Awas Yojna.
Ministry has allocated INR 322 Billion for RAY during 12th Five Year
Plan. Increased provision of INR 75,000 instead of the earlier limit
of INR 50,000 per EWS/LIG dwelling unit is meant to boost the low
income housing in the country. Similarly, Centre has also improvised
the Interest Subsidy Scheme in favor of masses. As per the amended
scheme, nearly 1 Million beneficiaries would be covered under ISS during 12th five year plan. INR 36 Billion is allocated for the implementation of ISS for Housing the Urban Poor (ISHUP), which is rechristened as
the Rajiv Rinn Yojana (RRY).
The Reserve Bank of India has relaxed the norms for external commercial borrowings or ECBs for Housing finance companies for the
purpose of on-lending for low cost housing units. Ease of fund raising
through external commercial borrowing route is a major step to propel
the affordable housing sector. Builders can borrow cheaper funds
from abroad, thereby leading to significant fall in the financing cost.
As per the amendments, the total experience of developers going for
ECB route has been lowered to 3 years, against 5 years. Unlike earlier,
there is no need of minimum paid-up capital for HFCs to avail external
borrowings. The aggregate limit for ECB has been extended for the FY
2013-14 and FY 2014-15 with a ceiling of US$ 1 Billion in each of the
two years, subject to review thereafter.
Single
Window
Clearance
Fund
Raising
through
ECB
The major hurdle in low cost housing is the excessive duration of
approvals and hassles in procuring numerous approval certifications and clearances. Industry stakeholders and major developer
associations such as CREDAI have urged for streamlined approval
processes to bring down the cost of houses. Of late, some regions
have adopted the adored SINGLE WINDOW CLERANCE way which
has lead to remarkable cost reduction and convenience. The state
of Punjab has successfully followed the model with successful
implementation. On the similar lines, Municipal Corporations of
Delhi and Indore have introduced online sanction for building plans
and issuing completion certificates. More such developments are
expected to improve the housing sector performance in future.

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VARTIKA SEHGAL
Sr. Research Specialist
RNCOS
E mail: vartika.sehgal@rncos.com
Website: www.rncos.com
Phone: +91 120 4224700 /01 / 02/ 03