Moneycontrol Pro Panorama | Is India's affordable housing story over?

Behind this supply drought lies a perfect storm of barriers. Land costs have soared, private equity has stayed conspicuously absent, urban infrastructure remains inadequate, and approval processes continue to strangle projects.

Between 2011 and 2024, affordable housing attracted a meagre $1.9 billion in private equity, representing less than 8 percent of total residential sector investment. Bigger developers have fled the segment en masse, deterred by razor-thin margins and the mounting expenses of land and construction.

For economically weaker households, the EMI-to-income ratio has surged from 43 percent in 2020 to 60 percent today while middle-income families fare a little better, with their ratio rising from 28 percent to 40 percent over the same period. Rising property prices and fluctuating lending rates are systematically pricing out the very people these homes were meant to serve.

Even well-intentioned policy interventions reveal structural distortions. The Reserve Bank of India recently raised loan limits for priority sector lending, with metros now eligible for loans of up to Rs 50 lakh on properties worth up to Rs 63 lakh. Yet this creates perverse incentives. Banks, eager to meet their priority sector targets efficiently, gravitate towards these higher-ticket loans while high-cost affordable housing finance companies shoulder the burden of smaller loans to riskier borrowers.

The financing architecture itself works against affordable housing lenders. Non-banking financial companies must maintain 100 percent risk weights on housing loans while banks and housing finance companies are allowed a 35 percent risk weighting. This disparity gives banks a structural advantage while penalising institutions that do the heavy lifting in under-served markets.

Furthermore, these lenders face higher operating costs and field collections, with bounce rates reaching 11 percent compared to banks' 4- 5 percent. They remain ineligible for refinancing through the National Housing Bank and cannot access mortgage guarantee protections available to other lenders.

Affordable housing finance companies had a strong run, posting robust 35-45 percent growth in assets under management between 2015 and 2024, reaching a market size of Rs 13 lakh crore. However, industry analysts predict this momentum will slow to 20-25 percent through 2028. Credit costs are ticking upwards, and so are non-performing assets.

A fundamental mismatch persists between where affordable housing is needed and where it gets built. These projects cluster at city peripheries, far from transit corridors and employment centres where residents actually need to live.

With nearly all of the affordable housing customers dependent on financing, the opportunity is immense. Yet without addressing supply-side barriers, expanding floor space indices, repurposing government land, and creating viable financing structures, India's affordable housing story risks becoming a cautionary tale of policy ambition remaining unfulfilled.

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