The Indian mass housing market is merely a few decades old. From plots being sold as residential units by a few select developers or development authorities, the switch to intense construction (as seen today) by a host of unknown entities began in the 2000s.
Rewind to the time between the mid-1980s and 1990s when the only mass housing that was available in urban India was G+3 or 4 (ground floor plus three/four floors) housing without lifts, provided by development authorities such as the Delhi Development Authority (DDA), or the Ghaziabad Development Authority (GDA).
Priced at affordable rates on a hire-purchase scheme that allowed consumers to pay for it over 10-15 years, these catered to the older population that used its retirement benefits to make the down payment, and pension amounts to pay the monthly instalments. Consumer finance was unheard of. What was available came from scheduled banks at 16.5 percent interest.
The first reform aimed at privatisation came during this time when development authorities allotted land to groups of registered buyers to build Cooperative Group Housing Societies (CGHS). By the mid-1990s that too was mired in fraud, and over 3,500 houses in Dwarka (Delhi) remained incomplete due to irregularities in operations. Many still languish. That was the first round of structured fraud in India’s housing market.
Housing & Habitat Policy: The year 1998 was a watershed in the Indian housing industry as the first housing and habitat policy was framed, which called for greater private sector participation in housing to be able to fulfil the ambitions of the middle class. The opening of the economy in 1991 and the subsequent rise in salaries fuelled ambitions of the middle class who were now travelling to newer cities in search of employment.
To make this dream possible, affordable housing finance at about 8.5 percent interest was also disbursed by the housing finance arm of the scheduled commercial banks. The Life Insurance Corporation (LIC), the Punjab National Bank (PNB), and the Syndicate Bank created housing finance arms. The National Housing Bank, which was created in 1988 as the refinance agency to make the housing sector affordable, was given greater powers, including regulation of housing finance companies till 2019. Its intent was to make finance and land available at cheaper rates.
The move was aimed at allowing working populations to own a house. But social sector obligations were in place, and foreign investment in housing was not allowed despite the fact that a lot of foreign money was coming into commercial real estate.
Cheap Home Loans: The floodgates opened in the 2001-2004 period, when home loan interest rates eased, and private developers started getting money to launch multi-storey condominiums with common maintenance, packaged with lifestyle features. This first generation of professional developers created housing for the masses. The government, on its part, gave tax breaks under Section 80IB(10) provision to developers who built 1,000 sq ft homes in Delhi and Mumbai, and 1,500 sq ft homes in smaller cities. The tax break was from 1998 to 2005, which was extended till 2007. Houses availing this offer had to be completed by 2012.
Developers were new, and started bringing houses to a starved populace, and with easy access to finance, for the first time in the history of independent India, a large number of young professionals in their 40s started paying towards a house of their own. Houses took between 2-4 years to construct, and buyers started paying for the house based on the square-feet.
Soon, the demand outgrew the supply, and one lot of buyers made money off buying at launch prices, and selling at market rates significantly over the launch prices. This investment avenue where quick and high profits could be made created a new breed of investors. The markets had overcome the Harshad Mehta stock market scam of 1996, SEBI was in place to protect the consumers, and the National Housing Bank was set up to refinance banks for housing loans and also act as a regulator to the 34-odd housing finance companies.
The 10 Percent Investor: The investors between 2004 and 2006 came with a new formula. They paid the token amount/down payment for the apartments through the money made off stock markets or by sale of previous property and used borrowed money in some cases to pay the instalments. As more speculators meant more cash flows, by the mid-2006, the end user had been edged out of the market. In a survey on affordability of housing in 2006, most end users said they felt the prices had gone beyond their means.
The speculators flourished, and a whole generation made money by timing their entry and exits from the property market. Advising them in these investments were a large number of brokers who worked on 4-6 percent commissions from developers. Many promised to pass on a percentage of the commission to buyers, thus incentivising them to enter the property market.
It was a golden time for those investing in houses for quick returns, and for the brokers and developers as well — it was the actual home buyer who got the short end of the stick. What was happening during this period was the prelude to greater horrors that were soon to unfold in India’s residential real estate market.
(This is the first of a three-part series looking into the residential real estate sector in India, examining the reasons that led to the current undue delays in project delivery. In part two, read how the scams of today took shape in 2005-2012)
E Jayashree Kurup is a writer-researcher in real estate and Director Real Estate & Cities, Wordmeister Editorial Services. Views are personal, and do not represent the stand of this publication.
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