Collapse of affordable housing

A. Srivathsan

A drastic intervention that combines incentives, subsidies and regulation is required to address the housing crisis.

The din of real estate boom in India drowns the stark realities of housing crisis that looms large. About 1.5 million houses are built every year. Home ownership in urban areas has increased to 67 per cent (2001). Foreign direct investment in housing and real estate has grown from Rs.171 crore (2005) to Rs.8,749 crore (2007). The figures impress until we look at another set of numbers. Housing shortage, as on 2007, was 24.71 million. The Eleventh Planning Commission admits that the situation will not improve much in the next five years and the shortage will grow to 26.53 million. It may be hard to believe that with such levels of investment in real estate, housing shortage exists.

A clearer picture emerges when we sieve the data further. Of the 24.71 million shortage, 21.78 million pertains to EWS (economically weaker sections) and 2.89 million to LIG (low-income group). Together, these two groups account for 99 per cent of the deficit. On the contrary, housing shortage in upper income groups is a meagre 40,000.

Housing policies since 1994 have taken note of the situation. The Planning Commission too is aware of it. The thrust of the policies has been that the state cannot deliver the much-needed affordable housing and that it is time to adopt a market-friendly approach and encourage private sector investment. Rationalisation of stamp duty, repeal of the Urban Land Ceiling Act and opening up of the real estate sector for FDI were proposed to improve the situation. It was argued that once the Land Ceiling Act was repealed, more land would be released and affordable housing schemes would become possible. The rationalisation of stamp duty would bring down transaction costs. Most of the States have implemented these measures. But contrary to the prediction, housing for lower income groups has not shown any improvement. Even projects such as housing for all launched by the Ministry of Housing and Urban Poverty Alleviation has achieved only 15 per cent of the targeted numbers.

PPP and FSI methods

Among the different methods proposed by the National Urban Housing and Habitat Policy, 2007 and earlier policies to tide over the problem, public-private (PPP) joint ventures and exemptions in Floor Space Index (FSI) alone have caught the attention of the builders and the state alike. The PPP model is now touted as a possible cure for housing ills. Under this model, the state offers land and private developers bring in capital and efficiency. Together, they provide affordable housing. Although in principle it appears a way forward, in reality State-level housing boards have not thought through this process. Nor have they set any overall targets.

In the absence of sophisticated assessment tools such as the Housing Corporation’s Economic Assessment Tool or Development Control Toolkit employed in the United Kingdom, housing boards in States such as Tamil Nadu take a simple market-based calculation and generate a small percentage of social housing. The rest of the built-up area is sold as per market norms.

In many developed countries, housing is taken to be affordable when it can be bought or rented with 30 per cent of the gross household income. Housing strategies are articulated with reference to the median income levels. In India, such a concerted effort is missing. The housing boards have shifted towards a for-profit model in which the lands held by them are valued for the revenue they offer. As a result, the opportunity to strategically intervene and enhance the quantity of affordable housing is lost.

Even more socially committed States such as West Bengal which adopted the PPP model as early as 1993 with a higher proportion of affordable housing could not deliver much because they could not be scaled up to meet the burgeoning demand.

Realising that joint ventures needed to be supplemented, suggestions were made, as early as 1998, to compulsorily reserve 25 per cent of housing for lower income groups in all private and public housing development. This is similar to the popular inclusionary-zoning regulation practised in countries such as the United States and Ireland. In many cities, inclusionary-zoning is a minimum condition a developer has to fulfil if he or she wants to enter a lucrative housing market. For example, the New York City inclusionary zoning requires that 20 per cent of the housing be developed as affordable for life. The developer gets a 33 per cent density bonus. This is an attractive offer for a developer who gets 13 per cent of additional housing units to sell and make up the profits. Such steps also ensure that affordable housing units are developed within the cities and not ghettoised as smaller enclaves in suburbs.

Incentives for developers

In the U.K., where an average house costs over eight times the average salary, planning obligations insist that in projects that develop more than 15 housing units, 50 per cent should be reserved as affordable units to own or rent. The developers are given various incentives for doing this. Well-worked rules, attractive incentives, increased options for developers and local housing authorities, flexibility, tight enforcement on deliverables and regulation of tenure have all ensured the successful implementation of this scheme. In addition to these tools, many cities have developed various grants and products such as tax credits to facilitate affordable housing.

In India, subsidies for affordable housing are under threat. The irony in a country committed to the welfare of the poor — failure to reserve 25 per cent for affordable housing and the lack of alternative schemes — cannot be missed. While joint ventures and transfer of FSI schemes are eagerly embraced, policies that insist on social obligations for private developers await consideration.

The current emphasis is on financing middle and higher income group housing. The National Housing Bank report says housing finance companies have disbursed Rs.26,000 crore and the scheduled commercial banks Rs.50,398 crore (2005 figures) towards housing finance. This amounts to 53.5 per cent growth over that of previous year. The report also states that between 2001 and 2004, the average loan size was Rs.4,08,450, the average area of the property financed was 105.37 square metres and those who availed themselves of loans had a monthly income of Rs.20,761. In contrast, recommendations to support housing for the poor or make them creditworthy have not been taken up seriously. The proposals to set up a national shelter fund and a risk fund with Rs.500 crore each are yet to take off. These two funds were meant to support primary lending institutions to address the housing requirement of the EWS. Surprisingly, the Housing Policy 2007 does not even dwell on the shelter fund and is silent on the risk fund. After a long wait, only recently was a standalone micro-credit scheme for housing launched. The silence on developing rental housing as an option is a different story.

What lies at the core of affordable housing is land and land cost. The real estate boom has only added pressure on the urban land. Neither can the state deliver the housing that is required nor can the market be trusted to provide affordable housing. A drastic intervention that combines incentives, subsidies and regulation is the need of the hour. If need be, land for social housing should be reserved and developed like special economic zones.

Until housing rights are met, all talk of slum-free cities will be a sham. In such a situation, eviction of slum dwellers will amount to a cover-up of the state and society’s failure to provide affordable housing for the poor.

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