How India can bridge the affordable housing gap
New Delhi: Affordable housing is not only essential to the well-being and health of the people but also for the smooth running of economies. Yet all over the globe, in advanced and developing economies alike, a majority of the cities are struggling to give their citizens decent, affordable housing. Given the rapid rate of urbanization being witnessed all over the world, coupled with the far less impressive rate of income growth at the lower levels of the social pyramid, we are presented with a rather gloomy picture.
Over the next ten years, the number of people who are seriously challenged by urban housing costs and will continue to inhabit substandard housing is going to rise exponentially. Throughout, India will continue to figure among the most housing-challenged nations unless the new government delivers on its electoral promise to make housing for all a reality.
The difference between what most households can afford to pay for a home without spending more than 30% of their income and cost of an acceptable normal housing unit is called the affordability gap. Needless to say, the affordable urban housing gap will only increase as urban populations grow. Currently, trends indicate that the next 10-12 years will see the arrival of over 106 million more low-income urban dwellers globally.
This trend gives rise to a serious question - how can the affordable housing gap be bridged? What are the means available to governments to achieve faster delivery of such homes? There are four primary approaches to handle this problem, all centered on lowering the cost of construction, land, financing, operations and maintenance.
Implemented individually, each of these approaches can significantly decrease the affordable housing gap in a country like India. However, if implemented simultaneously and in tandem, they can reduce the cost of affordable housing in the country's urban areas by 35-50% and substantially decrease India's affordable urban housing gap over the next ten years.
* Unlocking Land Supply
Unlocking land supply is the primary and most vital aspect, because land is the largest expense in real estate. Making existing land in strategic urban locations available for development of affordable housing is not as complicated as it may seem. In fact, it is not a question of availability at all but merely one of greater will at a government policy level.
In India's primary cities, as in many of the largest cities anywhere in the world, many significantly large parcels of land actually usually remain underused or unoccupied. Most of such land belongs to the government or the local authorities and could be sold to purchase other lands for affordable housing, or released for development of such housing.
In cases where such land parcels belong to the private sector, it can be brought forward for affordable housing development through various incentives such as density bonuses (increasing the allowed floor space on a particular plot of land and therefore increasing its value, in return for which the owners must provide the land for affordable housing projects.)
* Reducing the cost of construction
While the manufacturing and other related industries have increased productivity consistently in the past few years, output in the construction sector in India and also most other countries has gone down or stagnated. Also, residential projects are still built using the same techniques that were used five decades ago.
The costs of housing projects development could be reduced by over 30% and the completion time shortened by over 40% if more developers start using the latest construction methods and standardized project designs (for instance, assembling housing structures from prefabricated components manufactured off-site). Process improvements such as efficient procurement methods would help, as well.
Improved maintenance and operations
Upto 20-30% of housing costs go into maintenance and operations. Energy-efficient retrofits such as new windows and insulation can cut down these costs. Maintenance expenses can also be reduced if more developers tie up with qualified suppliers (through licensing and registration) and through consolidated purchasing.
* Lowering financing costs
Lowering the financing costs for real estate developers and buyers can go a long way in helping banks and financial institutions to safely make and sell more home loans to lower-income earners. Programs such as contractual saving schemes aimed at helping people with lower levels of financial discipline towards saving would assist low-income housing buyers to accumulate the corpus needed to make down payments on a home, making it possible for them to service smaller home loans. Such programs can also be used to provide capital with low-interest mortgages to most savers.
The Indian governments also needs to step in to cut down the financing costs for developers of affordable housing by reducing the risks associated with housing projects and making them more affordable — for example, by guaranteeing tenants or buyers of completed units.
It is certainly true that the policy aspects of this four-pronged approach towards taking affordable housing from the level of electoral mandate to ground reality is already being seriously examined by the new BJP government. However, only an approach that assimilates all four solutions into unified implementation will be able to make a visible dent in India's affordable housing shortfall.
(Sachin Agarwal is CMD - Maple Shelters)