Affordable Housing – A Myth or Reality

Affordable Housing is new buzz word in Real Estate market. Currently Real Estate sector is going through difficult times as the economy is still in bad shape and interest rates are high. Job loss is still a reality and it will take atleast 2-3 years to bring the economy back on track. Real Estate inventory has piled upto alarming levels in major cities. Currently banks lend at 14%-16% to builders which further increase the cost of  property. In order to boost demand recently RBI revised the definition of Affordable Housing to benefit borrowers. Affordable housing is clubbed with infrastructure lending and is covered under priority sector lending. As per RBI, definition of Affordable Housing is Housing Loans eligible under Priority Sector Lending. RBI eased norms for banks to raise long term funds to finance Affordable Housing projects. In short, any fund raised for Affordable Housing is exempted from regulatory compliance like CRR or SLR therefore it may reduce cost of funds by upto 2% for banks. It will increase liquidity with banks and banks can lend to borrower or builder at lower interest rates. Either ways it will benefit borrower.

(a) Low cost of funds for Affordable Housing Projects will incentivize builders to focus on Affordable Housing therefore affordability for buyers.

(b) Low Interest Rate Home Loans to Borrower will reduce EMI. Lower interest rate will help to increase demand and make houses more affordable. A borrower can expect impact of upto 0.5%-1%  in Home Loan Interest Rate. Currently Rate of interest on Home Loans of upto 20 lakhs is lower as it fall under Priority Sector Lending but this limit is now revised by RBI.

Definition of Affordable Housing

Existing:  Home Loan of upto 20 lakhs i.e. property costing max 25 lakhs in major urban cities is classified under Affordable Housing. For other urban areas, Home Loan of upto 15 lakhs i.e. property costing max 20 lakhs. LTV ratio as per RBI guidelines is 80%. The existing definition of  Affordable Housing is redundant as it is next to impossible to find property under 25 lakhs in urban cities.

Revised: Home Loan of upto 50 lakhs i.e. property costing max 65 lakhs in 6 Metropolitan cities of Mumbai, Delhi, Kolkata, Chennai, Hyderabad and Bengaluru will fall under Affordable Housing. For other areas, Home Loan of upto 40 lakhs i.e. property costing max 50 lakhs.

Important Points for Buyer

In order to avail benefits of Affordable Housing, a builder may compromise on certain aspects which a buyer should check thoroughly. If cost of property is upto 65 lakhs then there is every reason to go through following important points

1. Construction Quality: The cost of land is very high in Metro cities which is major cost component in any project. In order to fit project in revised definition of Affordable Housing, builders may compromise on construction quality. Currently few builders are advertising XYZ construction technologies as superior compared to traditional construction techniques which may or may not be true. Readers are advised to do proper research before signing below dotted lines. Construction quality directly impact the life of property. You can check the psf cost of construction with builder & details of construction technology used. For good construction quality, the psf cost of construction should be atleast Rs 2000 psf in metro cities.

2. Size of Flat: Recently one of my client bought a 2 BHK with Super Built Area of 800 sq ft. Considering loading factor of 20%, the built up area will be of 640 sq ft only. My client was convinced with layout of sample flat. Some time back, i wrote a dedicated post on Sample Flat – Trap from Builder. I think gradually we are adopting the concept of matchbox house as prevalent in Hong Kong keeping affordability in mind & compromising on size of unit.

3. Location: On detailed analysis, i observed that some reputed builders are misusing the revised definition of affordable housing. They increased the price of projects on outskirt/out of city and marketing it as affordable housing. The complete marketing revolve around Price as this is key deciding factor. All other imp factors take back seat. Take an example of upcoming township on Mumbai-Pune Highway (4-5 kms from Panvel, right on highway) from very reputed builder sold out at approx Rs 5000 psf. A 3BHK was sold for under 65 Lakhs thus comes under Affordable Housing. As a buyer from Mumbai, my psychic is that property in Mumbai is very costly & average price is more than 10k psf. A project at Rs 5000 psf looks very cheap and location took back seat in comparison to price. Fact of the matter is that builder made huge profit as psf rate in that particular area is not more that Rs 2.5k psf.

As a buyer, we should not compromise on fundamentals of Real Estate purchase. Any decision to buy a property should be 360 degree rather only revolving around price. Each factor like Price, Location, Construction Quality, Size of Apartment, Amenities etc should be given proportionate weightage before finalizing.

Affordable Housing as Value Housing

Land is scarce natural resource and cannot be produced/generated. Lets accept that Cost of Land is non-negotiable due of scarcity. It defeats the whole purpose of Affordable Housing. Affordable Housing should not be mistaken with cheap housing or Low Cost Housing. It should be marketed as Value Housing wherein builder should bring operational efficiency to cut down cost. Some of the factors which can influence operational efficiency are

1. Control Project Delay: Delay in project increase cost in geometric progression. In most of the cases, delay is deliberate to sell the project before completion. Builders launch new projects to complete previous project. All these factors result in increased cost which is paid by buyer i.e. Buyers pay extra for operational inefficiency of Builder

2. Economies of Scale: The big builders are in better position to deliver value / affordable housing compared to small builders. Economies of scale reduce cost drastically therefore without compromising on quality, a builder can deliver Value Housing i.e. best value to buyer.

3. Market Intelligence: Builder should be future ready by focusing on Market Intelligence i.e. identify upcoming areas. Golden rule for any purchase is that buy at low price by identifying opportunities well in advance and sell at higher rate. It will create win win situation for everyone. Builder can share cost benefit of Market intelligence with buyer by providing value housing.

4. Optimum Utilization of Space: Again builders have advantage of learning curve. Ideal loading factor is 25% with all amenities. Optimum utilization of space ensure maximum monetization for builder and best value for customer keeping cost under control.

Hope Value Housing will be reality soon as new govt has set a ambitious housing target of providing house for all by 2022. Govt has already taken few positive steps to revive real estate sector but things cannot change overnight. The positive environment will soon bring positive changes on ground which will turn dream of Affordable Housing into reality.

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