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The Future of Affordable
Housing

2. The past couple of years have witnessed
significant project launches in the afford-
able 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 vol-
ume 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 move-
ment, especially for the EWS segment
through interest subsidies, tax benefits,
incentives to developers in the form of
higher FSI, subsidized loans among
others.
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 Weak-
er Sections (EWS), Lower Income Groups
(LIG) and Middle Income Groups (MIG).
The Future of Affordable Housing
Affordable Housing - RNCOS Definition
Category
EWS < INR 1,50,000 Up to 300 Sq Ft Sanitation, adequate
water supply and power
EMI does not
exceed 30-
40%
of gross
monthly
income of the
buyer
Provision of community
spaces and amenities
such as parks, schools
and hospitals
300 - 600 Sq Ft
600 - 1200 Sq Ft
INR 1,50,000 -
3,00,000
INR 3,00,000 -
10,00,000
LIG
MIG
HH Income (P.A.) Basic Amenities EMI/Rent
Size (Super
Built Up Area)
Source: RNCOS

3. As per census 2011, there is huge short-
age of houses for the lower most cat-
egory 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.
Urban Affordable Housing Shortage
Category
Total 66.3 24.7
EWS 0-3,300 21.81 21.78
2.89
0.04
27.57
16.92
3,301-7,300
7,301-14,500
14,501 and above
LIG
HIG
MIG
Monthly Per Capita
Expenditure (INR)
Housing
Shortage
(Million)
Estimated No. of
HHs (2007)*
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. The growth in housing construction is directly
linked to the country’s macro economic perfor-
mance. 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)
6.4%
3.3%
5.8%
6.1%
6.7%
2011 2012 2013e 2014f 2015f
RealGDP Growth
11.70%
88.14%
EWS
LIG
MIG
HIG
0.15%
0.01%
Source: Central Statistical Organization, EIU
Note: e/f = EIU Estimation/Forecast
Breakup of Housing Shortage
The slowing pace of Indian econ-
omy along with steep depre-
ciation in rupee against the US
dollar has added to the woes.
Source: Report of the Technical Group (11th Five Year Plan: 2007-12) on
Estimation of Urban Housing Shortage

5. Problems at Consumer Front Problems at Legislative Front
Inadequate Savings Lengthy Approvals
Lack of Financial Awareness Unclear Laws and Guidelines
Ever-Rising Cost of Construction
• Majority income of LIG households spent
on food, non-food and house rent
expenses
• 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
• The building bylaws and rules for FSI, zon-
ing and development plans lack clarity
• Overlapping guidelines for real estate
development
• Random modifications in regulations ham-
per the entire project planning
• Disposable surplus is highly sensitive to
change in expenditure
• Low awareness about emergence of Micro
Housing Finance Companies/Self Help
Groups
• Inadequate information about Government
schemes meant for lower income housing
• Insufficient knowledge of financing options
and rationale to judge the most viable
option
• Construction cost includes cost of cement,
steel, sand and labor
• Other costs comprise cost of land, registra-
tion, 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. Amend-
ment in
Flagship
Schemes
Single
Window
Clearance
Fund
Raising
through
ECB
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 dur-
ing 12th five year plan. INR 36 Billion is allocated for the implementa-
tion 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 com-
mercial 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.
Initiatives to Spur Growth
The major hurdle in low cost housing is the excessive duration of
approvals and hassles in procuring numerous approval certifica-
tions 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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8. VARTIKA SEHGAL
Sr. Research Specialist
RNCOS
E mail: vartika.sehgal@rncos.com
Website: www.rncos.com
Phone: +91 120 4224700 /01 / 02/ 03
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