Demand for affordable housing strong despite supply challenges: Experts

A shift among developers towards affordable housing, along with a nudge from the government through regulatory changes and subsidies, will boost the segment. According to the Knight Frank-Business Standard report, home loans are the most preferred mode of financing when buying a house across all income groups. But affordable housing buyers get limited loan opportunities and depend heavily on housing finance companies (HFCs). 

At the Business Standard BFSI Insight Summit’s panel discussion titled ‘Banking on Bricks’, experts from the housing finance sector — Tribhuwan Adhikari, managing director (MD) & chief executive officer (CEO), LIC Housing Finance; Deo Shankar Tripathi, vice-chairman at Aadhar Housing Finance; Ravi Subramaniam, MD and CEO of Truhome Finance (formerly Shriram Housing Finance); Girish Kousgi, MD and CEO of PNB Housing Finance; and Gulam Zia, senior executive director at Knight Frank India — discussed important issues pertaining to the housing sector. Edited excerpts: 

 

Considering a drop in affordable housing sales and a surge in luxury home sales, is it fair to say that the affordable housing story is over? 

  Adhikari: No, I don’t think so. Only about 10 to 15 per cent of the Indian economy is organised, rest is unorganised. The affordable segment caters to this unorganised segment of society. The reasons behind the affordability issues are two-fold; one is a demand-supply equation. There’s demand, but the supply is limited because not many developers are interested in the affordable segment. It is low cost, away from the city centres, mostly in the outskirts of cities where developers are not sure of demand amid a lack of liveability conditions. 

Right now, the affordable segment is not as margin-intensive as a semi-luxury segment or a luxury segment. Any developer would like to go wherever he can accomplish his yearly sales, revenue, and profit targets in one project. 

Do you agree that there’s a supply constraint in affordable housing due to a lack of margins? 

  Zia: The affordable stocks are limited, and developers are not adding more. The problem with affordable housing is the impact of the factors, such as high interest rates, etc., is more on the supply side than it is on the demand side. 

In times to come, when the Pradhan Mantri Awas Yojana (PMAY) 2.0 is giving lots of incentives for the lower-end demand to be generated, we will not see enough supply and that can have an impact on the prices of affordable housing. Because, in the last 4-5 years, there hasn’t been a considerable amount of affordable housing supply. 

In times to come, the demand-supply scenario may push the prices in affordable housing higher in the next year and a half too, when PMAY 2.0 starts showing its result on the ground. 

How do we solve the affordable housing problem? 

  Tripathi: In the last 4-5 years, we have been reading that the higher-end segment is growing. But we must understand how many people are taking loans of Rs 1 crore, Rs 10 crore, Rs 20 crore, and Rs 50 crore to buy a house and the addressable market. 

In India, today, 95 per cent of housing loan requirements come from economically weaker sections (EWS) and low-income groups (LIG) who can't afford a house beyond Rs 25-30 lakh. That's why the Reserve Bank of India (RBI) and the Government of India (GoI) have also kept the affordable property prices in metro cities at Rs 45 lakh and in non-metro cities at Rs 30 lakh. 

We have to see an objective point of view, whether we serve the volume or we serve the value. From the housing market side and the economy side, if more value is created, credit growth happens. Housing always has a multiplier effect on employment, supporting 250 industries and the services sector, which is the economic part. 

People taking a home loan of Rs 1 crore need to earn Rs 25 lakh at minimum, annually. How many people earn Rs 25 lakh and more per annum? We should think about where the country lives. 

Now the Tier-III, Tier-IV, and Tier-V towns are developing rapidly. According to a report by State Bank of India, in 2022, housing requirement in Tier-III and Tier-IV towns was 32 per cent. In the subsequent three years, it went up to 36 per cent, indicating an improvement. The requirement for affordable housing is there and will continue to be there for the next 25 years. As income grows, the quantum will increase.  Thirty per cent of the cost of construction has gone up in the last four or five years. The person who was taking a loan of less than Rs 15 lakh now takes a loan of about Rs 20 lakh. The shift has happened. Today, our Rs 25 lakh and below disbursement is at 85 per cent. There are about 65 affordable HFCs. Hence, affordable housing finance is going to stay. 

A report by Kotak also mentioned that now housing is not confined to the top eight cities, but it has gone beyond the 200 cities. So, their value will not be much. Today, 60 per cent of housing happens in the urban centres; what about the peripheries? Hence, affordable housing is going to stay. 

Have you seen changes in the average ticket sizes that support the theory that the affordable housing story is sluggish?

  Subramaniam: According to Knight Frank, in 2011, about 275,000 units were sold, while in 2023, around 325,000 units were sold. Before we celebrate the real estate industry, let’s understand that this is a growth rate of under 15 per cent 

over a period of 14 years. 

The reason why it seems like a huge growth industry is not because of ticket size, but because of the fact that the value of properties has gone up significantly. A lot of migration has happened because of the increase in value, and it has become more expensive to own real estate in India than it was. It has led to an increase in the sales of properties with large values. The story will be very different if we see the same graph in terms of sold square feet. 

We still have demand for affordable housing in a segment of population. The reason why people are not buying affordable homes anymore is because they can’t afford them. It is no longer affordable. To increase affordable housing sales, a lot has to be done by affordable HFCs and banks. Banks do not fund self-employed individuals. Earlier, a lot of affordable homes were bought by self-employed individuals. Today, they don't have access to funds. Today, 70-80 per cent of our portfolio is self-employed. 

Do you think we need to change the definition of affordable housing considering the price increase? 

  Kousgi: Today, in the book built by affordable companies, it's a little over a lakh crore (Rs 1 trillion) out of Rs 34 lakh crore (Rs 34 trillion); percentage-wise, it's hardly anything. If you look at the potential, it is in terms of sheer value, about 40 per cent. In affordable housing, developer participation is not there because it's not viable. 

Today, look at the focus of the government and every HFC. LIC Housing, PNB Housing, Bajaj, etc, are all getting into affordable housing because all the banks focus on super prime and prime. So, the market and demand are huge. 

On the supply side, the problem is the developers, who are not coming up with affordable projects. However, in India, barring the top two cities, Mumbai and Delhi, there is a good portion of affordable housing in the rest of the markets. The constraint of supply from developers is a structural issue. The government has taken a lot of initiatives. They have committed Rs 10 trillion for housing. Through PMAY, about one crore customers will benefit in the next five years, meaning 2 million customers every year will get a subsidy. 

Hence, the question is not whether affordable housing is over because it has not even started. 

Do you think, from a policy perspective, that steps need to be taken to boost affordable housing? 

  Adhikari: Yes. If we really want affordable housing to take off the vis-à-vis the potential it has, then all stakeholders have to put in corroborated efforts. At LICHFL, we are the biggest HFC. We were not there overtly, but covertly. But, this year, we have taken a conscious step to get into the affordable segment. PMAY 2.0 is there, which will provide one crore houses for the urban poor in the next five years. It will significantly boost the demand. We need the developers to come in as well. But they also need incentives. It takes a huge amount of gestation period to develop a project. They have to think of innovative ways and methods. Also, clearances from the various government and other agencies for various no-objection certificates (NOCs), need to be sped up, maybe with a single-window process.  Some (Standard Operating Procedure) SOPs in the form of affordable credit for the builders' finance and affordable finance for the builders through government subsidies or a cut in the registration fees for affordable housing may help. This segment has just not taken off as yet, and there’s a huge potential. 

Regulations have been tightened for both non-banking financial companies (NBFCs) and the HFCs, particularly over the last few years. Do you think they are good for the health of the sector overall even if there are short-term pains? 

Subramaniam: Anything that is eventually good for the consumer will ultimately translate to good for the industry. The government regulations were a bit unclear earlier. Now that the regulations have been clarified, every affordable HFC, HFC, NBFC, and bank follows them. It's not something that is specific to the HFC sector. 

There are no regulations per se that are detrimental to the affordable HFCs compared to a regular HFC or an NBFC. If at all, affordable HFCs get a little bit of a benefit. Because of the way the new National Housing Bank (NHB) MD has been articulated about the support to HFCs is commendable. The larger challenge for me, where all the affordable HFCs need support, is that the prepayment penalty is a sore point for us. A two- to three-year window where I hold on to the customer or the customer pays a certain prepayment penalty if he needs the benefit of a better housing rate should be allowed. Apart from that, there is nothing.  

How do you think this problem could be solved? 

  Kousgi: If there is a regulation that says that because the primary motive of the government is to promote housing in the EWS, LIG, and MIG, all the HFCs will eventually move to emerging and affordable segments. If a regulation comes up that locks in the customers for two years, till they switch, it will help.