The relationship between housing and economy has been long established. Housing, an important economic indicator, drives multiplier effect across sectors and society and is key to human development, health and security, and economic well-being.
To achieve this, providing adequate housing for all is a pressing concern that the government has been trying to address. Launched in 2015, the Pradhan Mantri Awas Yojana-Urban (PMAY-U) was intended to resolve the urban housing shortage among middle-income and lower-income groups (MIGs and LIGs). This scheme has special provisions to promote home ownership among women.
While the original target of March 2020 could not be met, the programme has received the government’s continued focus—Budget 2022 allocated Rs 48,000 crore for PMAY, which was 75 percent higher than the Rs 27,500 crore budget allocation in 2021. Out of Rs 2,03,000 crore committed by the Centre, Rs 1,35,533 crore have already been released till date.
However, being able to supply affordable housing to all in a country with an estimated population of 1.4 billion is a challenge that very few countries face, and the upcoming budget is an opportunity for the government to incentivise this segment and accomplish this task.
Despite global headwinds, rising property prices and interest rates, residential real estate performed remarkably in 2022, with 215,000 units sold in the top seven cities of India—the highest in over a decade—registering a 68 per cent year-on-year growth. However, while consumer sentiment in homebuying has not been dampened, houses are undoubtedly becoming more expensive, which is a growing concern for the economically weaker section.
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Challenges of affordable housing
What plagues affordable housing? Persistent geopolitical issues and supply chain concerns in the past few years have led to raw materials becoming expensive, leading to rising input costs and pricing pressure. Most surveys showed house prices in India’s metro cities have clocked double-digit growth.
House pricing in tier 2 and 3 cities is also increasing, given the trend of remote work. With the geopolitical turmoil refusing to die down, the chances of price moderation are low, which affects the purchasing power of consumers from the MIG and LIG sections.
Further, rising home loan interest rates can also be a deterrent for this economic group, which relies on subsidies and housing finance to buy a home. Multiple revisions to the repo rate last year have increased the interest rate on housing loans in most banks to 8-9 percent and above.
While the higher- and middle-higher income groups can still absorb this, the weaker economic groups, already caught in inflation woes, can be dissuaded.
What the budget can do
First, to incentivise buyers, the Credit Linked Subsidy Scheme (CLSS) should be continued as it has been a major motivator with 2.54 million beneficiaries. Under CLSS, beneficiaries of the economically weaker section (EWS), LIG and MIG can seek housing loans from banks and other financial institutions at subsidised interest.
Further, the price cap of affordable housing requires a revision. In metropolitan cities, affordable housing is classified as a dwelling unit with a price ceiling of Rs 45 lakh and a carpet area of 60 square metres (645.8 sq. feet) or less. While the price band works for tier 2 and 3 cities, it cannot be applied to metro cities due to higher land prices and construction costs.
The ceiling of Rs 45 lakh is very low in a place like Mumbai and developers find it hard to deliver homes within this price cap. The budget would do well to adjust the qualifying price band based on the city. Mumbai can have a band of Rs 80-85 lakh and for other metro cities it can be raised to Rs 60–65 lakh.
This will further attract a broader spectrum of homebuyers. Considering the rise in key input costs, this would also ease the pressure on developers, who are right now passing on the price rise to customers.
The affordable housing segment was also affected by the pandemic because private companies reduced their activity as the intended customer segment was impacted the most economically. Now that market activity has resumed adequately and real estate too is seeing robust growth, the time is right for government incentives to boost affordable housing.
From the buyer’s perspective, there is an express need for more tax sops. The government can consider raising the tax deduction limit for home loans to Rs 5 lakh from Rs 2 lakh and reduce the tax rate to increase people’s disposable income, thereby leading to more homebuying.
From a builder’s point of view, the government can consider reintroducing the Section 80IBA registration timeline for affordable housing projects. This provision allowed developers to claim 100 percent tax exemption on profit, subject to several qualification criteria, including the approval deadline.
However, this exemption was available for projects that were approved till March 31, 2022. As this was a significant measure in making affordable housing projects attractive, it will be beneficial to restore this section to garner more builder interest.
The budget can also consider rationalising the goods and services tax rates for construction material such as steel and cement to reduce the rising cost of raw material, which will help moderate prices. Further, despite the recent capital infusion of Rs 5,000 crore, the overall size of the Special Window for Completion of Construction of Affordable and Mid-Income Housing Projects (SWAMIH) fund—set up under the Special Window for Affordable and Mid-Income Housing—can be raised to Rs 50,000 crore to improve the affordable housing segment and incentivise homebuying.
Wrapping up
As the Indian real estate market scales up to reach an estimated market size of $1 trillion by 2030, affordable housing is expected to be a major slice of that pie. All that needs to be done now is to spur growth in this segment, and Budget 2023 can chart out the path to truly achieve housing for all.
The author is co-head and COO - India Global, KPMG in India
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