Affordable housing: why the distress continues

This important segment can be revived with high-impact measures like tax breaks for developers and revising the pricing for homebuyers

Various factors in the last few years have prompted developers to shift their focus away from affordable housing and instead lean towards the premium and luxury segments. First, demand in the affordable segment has shrunk rapidly as the concerned target audience was deeply impacted by the pandemic. Thus, with demand shrinking, developers thought best to not launch projects in this category.

Second, the profits for developers in building affordable housing projects were wafer-thin even before the pandemic. Post-COVID-19, rising inflationary trends of the raw materials including steel, cement etc., and inflated labour costs, put immense pressure on the developers. They had little choice but to drift away.

Third, many interest stimulants that were previously extended to developers of affordable housing have expired in the last two years. This important segment thus needs to be revived with high-impact measures like tax breaks — for developers, so that they will focus more on building affordable housing, and for buyers to improve affordability.

For instance, to boost supply and incentivise developers to build more affordable housing, the government should have re-introduced the 100% tax holiday benefit they previously enjoyed under section 80-IBA in the Finance Act, 2016. This section provided for major tax relief on the profits earned from developing and building affordable housing projects. As is, amid low buyer demand and rising input and land costs, developers find it unviable to build affordable housing since their profit-margins are almost negligible.

According to the Ministry of Housing and Urban Poverty Alleviation, affordable housing is defined based on property size, price, and buyers’ income. For instance, affordable housing is a house or flat with carpet area up to 90 sq.m. in non-metropolitan cities and towns, and 60 sq.m. in major cities and valued up to ₹45 lakh for both. The central bank’s definition, on the other hand, is based on the loans given by banks to people for building a house or buying apartments.

For instance, for a city like Mumbai, a ₹45 lakh budget is meaningless. It would need to be increased to at least ₹85 lakh. In other top cities, the budget should be increased to at least ₹60-65 lakh. With such price revisions, more homes would qualify for the affordable price tag, so more buyers can avail of benefits such as lower GST rates at 1% without Input Tax Credit, government subsidies, etc.

Wait-and-watch mode

While demand certainly remains high for the affordable housing market in India, its target clientele is currently largely in a wait-and-watch mode. Rather than by large, listed developers, we have seen more launches in this segment by smaller players. Unless there are more buyers in the market for this segment, we may continue to see listed developers focus on luxury real estate.

The previously much-touted budget homes category (<₹40 lakh) has been seeing a decline in overall sales since the pandemic — to approximately 21% in H1 2024 (January to June) from over 38% in the period before the pandemic in 2019.

From 2019 to 2024

In a five-year period, the affordable housing sales across seven cities as per the number of units sold had dropped from 99,320 in 2019 to 52,610 in H1 2024. This year’s is lower than what was recorded in the pandemic year 2020, when 53,950 units were sold. The affordable housing market picked up in 2021-2022 with the sale of 87,510 units and 94,870 units respectively, in those two years. However, 2023 saw a decline when just 90,540 units were sold. From then on, it’s been a drastic fall to where we are now.

The above figures clearly show the sales trend in the segment in the last five years. There has been a slight uptick in sales share of these homes in H1 2024 as compared to 2023-end. We may continue to see similar trends by the end of the year too. The need of the hour is for the government to roll out incentives for this segment of buyers and unless done, they may continue to remain in a wait-and-watch mode.

Not surprisingly, this segment’s percentage share of the total housing supply in the top seven cities also fell to 18% in H1 2024 from over 40% in 2019. The total supply of new units also does not paint a positive picture. In 2019, 94,620 new units were released, whereas H1 2024 saw the supply of just 41,860 units. From 80,240 new units in 2023, this is indeed a steep decline.

Available units

As per ANAROCK Research, approximately 5.78 lakh units are currently available for sale across the top seven cities, of which 24% are in the affordable budget category priced below ₹40 lakh.

The government must seriously reconsider revising the pricing of homes within the affordable housing budget, taking into consideration city-specific market dynamics. As per the current definition, the size of units at 60 sq.m. carpet area is appropriate. However, prices of units (up to ₹45 lakh) are not viable across most cities.

The writer is Chairman, ANAROCK Group.

Published - November 08, 2024 03:18 pm IST