While a slew of measures, such as interest subvention for home loans up to Rs12 lakh, by the government may resolve the demand-side issues, a key supply constraint remains in form of high-land cost.
The government may have put its weight behind promoting low-cost housing in the country through schemes such as Pradhan Mantri Awas Yojana, under which it plans to build 2 crore houses for urban poor, including economically weaker sections and low-income groups, but think-tank Niti Aayog has identified high cost of land as one of the key factors constraining "rapid expansion" of low-income housing.
"A key constraint on rapid expansion of low-income housing is high cost of land. This issue turns even more important from the viewpoint of low-rent housing, which is critical to accommodating migrant population without creating slums. High land prices translate into high property cost and therefore low rental yields," the Niti Aayog noted in the draft of its three-year action plan, for which it has sought views from stakeholders.
According to a 2013 Report on Policy and Interventions to Spur Growth of Rental Housing in India, the draft said, rental yields in Mumbai fell to just 1.5 per cent in 2011, from 3.5 per cent in 2009, and 6 per cent in 2006. "With borrowing rates at substantially higher levels, these yields are too low to recoup the value of investment. The problem turns particularly serious when the target rental group consists of low-income families," Niti Aayog said.
Under the Pradhan Mantri Awas Yojana, along with building 2 crore houses, the Centre has also set itself a target of covering 94,97,398 households by 2019-20. In the year 2017-18 itself, 23,99,046 households are targetted. Furthermore, under the Housing for All scheme, the government in January announced creation of two new middle-income categories in urban areas, and one scheme for rural areas.
Against the initial scheme which provided loans of up to Rs 6 lakh at a subsidised rate of 6.5 per cent, now, housing loans of up to Rs 9 lakh and Rs 12 lakh get interest subvention of four per cent and three per cent, respectively. This is expected to cover nearly 65 per cent of the home loan customers of public sector banks (PSBs).
On Wednesday, the Reserve Bank of India, too, reduced the standard assets provisions on individual housing loans to 0.25 per cent, and also lowered the risk weights on such lending in a move that could make loans for new homes cheaper. The standard asset provisions, or the amount of money that is set aside for every loan made, was reduced to 0.25 per cent compared with 0.40 per cent earlier, which is likely to reduce interest rates on home loans. "The reduction in the statutory liquidity ratio (SLR) by 50 base points to 20 per cent, would help provide more liquidity to banks. This could prove beneficial for prospective home buyers with the expectation that lending institutions could further lower the interest rates on loans. A focus on controlling the inflation rate coupled with other reforms is expected to further foster the growth of the real estate sector in the second half of the year," said Anshuman Magazine, chairman – India and South East Asia, CBRE.
While the slew of measures undertaken by the government and the central bank may be a step to resolving the demand side issues that would increase the coverage of affordable housing, a key supply constraint remains in form of high-land cost as Niti Aayog has pointed out.
As a legacy of the Urban Land Ceilings and Regulation Act, 1976, large chunks of vacant land have disappeared from urban land markets. Many sick public sector enterprises own large unused land parcels in prime localities. Central and state governments own substantial urban land that remain unused or subject to encroachment.
The Land Acquisition Act, 2013 fixes compensation for acquired land at high levels, which makes the land acquired for affordable housing expensive.
To arrive at a resolution for the aforementioned problems, the Aayog suggested that while most of the states have now repealed the Urban Land Ceilings and Regulation Act, 1976, priority should be releasing the large pieces of land caught up in litigation, for public use.
"Expediting the resolution of existing and new cases will help free up this land," the plan recommended.
PSUs that are set for closure. For the issues arising out of the Land Acquisition Act, 2013, the think-tank said, "Short of amending the Land Acquisition Act 2013 for the purpose of acquiring land for affordable housing, there is no simple solution to this source of high price of land".
Another important red flag raised by the policy commission is the scarcity of horizontal space in urban areas, which is a result of the permitted floor space index (FSI) in Indian cities being "extremely low", which ranges between 1-1.5. "The topology of Mumbai closely matches that of Manhattan and Singapore but it has few tall buildings when compared to the latter cities. Available urban space can be expanded manifold by relaxing the permitted FSI," the plan noted.
Citing from a paper by New York University's senior researcher and independent consultant Alain Bertaud on Mumbai's infrastructure, the Niti Aayog illustrated the "deleterious effects of the restrictive FSI" comparing it with that of Shanghai. "In 1984, Shanghai had only 3.65 square meters of space per person. But the Shanghai Municipality then decided to make liberal use of FSI. Despite large increase in population since 1984, by 2010, the city had increased the available space to 34 square meters per person. In contrast, in 2009, Mumbai on average had just 4.5 square meters of space per person," Niti Aayog said.
While acknowledging that resolving many of the constraints leading to inflated land prices in the country would take more than three years, which is the term of the said action plan, Niti Aayog also said that steps in the direction must be initiated "urgently". On the one hand, it said, states must be sensitised about the benefits of policies that could help bring down the land prices, on the other hand, central government must make its contribution to solve the problem within the next three years.