By Ubaid Parkar
Affordability is subjective but it can be regulated if it is defined. There are many factors involved in the cost of housing; from land and construction costs, government taxes and housing loans interest rates. Affordable housing has been, the nomenclature at least, abused, chewed and spat out. The unregulated real estate industry has run away with this concept and jumbled the very meaning of it.
An attempt to define the Affordability Index
The U.S. Department of Housing and Urban Development (HUD) defines “affordable” as housing that costs no more than 30 percent of a household’s monthly income. Affordability, subjectivity aside, should be on the basis of the disposable income of a certain section of the population, mainly the low income group against the price involved for attaining a house.
The section of the population in turn has to be defined as well. A median, mean or a mode in this case can satisfy as a constant for the income group. Revision of the parameter on an annual basis can account for inflationary, disinflation or deflationary trends and can equate the resultant index accordingly through equilibrium levels.
The price ratio has another countenance to consider; housing loan lending rates through banks and financial institutions. In this case, the lending rates of banks have to be in sync with the guidelines of the Central Bank, the Reserve Bank of India’s (RBI) monetary and fiscal measures.
The income grid would follow a dichotomy of rural and urban low income groups. The current low income group population is defined with an income of Rs. 4000 – 6000 per month in the urban setting. That is a range of Rs. 48000 to Rs. 72000 a year. Assuming the bracket for the Indian income mode amounts to a monthly income of Rs. 10000 per month in urban areas, the income group moves up to Rs. 120000 a year.
If we follow the guideline of US HUD definition of affordability then the annual disposable for housing for this category stands at Rs. 36000 as per the above example. Cover that with a zero per cent interest in 30 EMI (a la the scheme by Nirman Nano City) and a subsequent interest rate thereafter for another 90 months, the income group can own a house for Rs. 360000, sans the interest and Government taxes.
The time scale is held as constant. The minimum living area as prescribed by the Government of Maharashtra is 300 square feet. This amounts to, over a decade of course, a maximum rate of Rs. 1200 per square foot regardless of the location of the township or locality.
Furthermore, the index can also be prescribed as an increment of the minimum square feet in tandem with the Income Tax slabs set by the Government. Furthermore, the majority of the population in the example will get an increment in their wages in the held period of 10 years and any additional income by others in the family, which will relieve pressure for future EMI payments.
The theoretical model is from the supplier’s point of view and can be regulated. The model ignores valuation of property as an inherent part of pricing and looks to ascribe to the implicit purpose of providing “affordable” housing i.e. maintaining the standard of living for conditions other than that of absolute deplorable. So the supplier of the housing has to subscribe to a certain section of the population which either has been prearranged by the mode or the Income Tax slabs and provide housing only at those rates or avoid the term “affordable” completely.
From the demand perspective the definition of affordability truly goes for a toss. In a Supreme Court judgment in February this year (Faridabad Gas Power Project, NTPC Ltd vs. Om Prakash), it stated “The best method, as is well-known, would be the amount which a willing purchaser would pay to the owner of the land.” This regresses to the very basic Demand-Supply equilibrium which has so far been ignored. Theories of affordability indices can be canned if developers adhere to market forces. We delve into the debate of the levels of Government intervention required; the US economy saw signs of Anarcho-Capitalism and Market Anarchism which caused its downfall. In India, the real estate sector is quite similar. It is more or less unregulated and developers were holding on to their prices even when the demand necessitated the prices to be halved. Reports circulated that home buyers in a spate and a constant barrage of property exhibitions found the prices too high for their liking.
The simple Demand-Supply model is something that has to be injected into the functioning of the economy. In this regard, a number of variables constitute the price of property. It includes price perceptions in a particular area, proximity to areas of interest like work place, neighbourhood, infrastructure, supply of civic amenities, future prospects of growth, investments, commercial developments, roads, convenience, the list could go on. All this has to be accounted for not only by the developer but also the purchaser. This leads to speculative transactions and fabricated inflations of prices. Although this has been accepted at almost an apathetic multitude, the same should not hold true for promising a decent standard of living. Affordable housing needs to be regulated under strict terms and should have a pre-defined target audience. Unfortunately, the outlook has been vague.
Government breaks and incentives
The Government can also provide ways to provide adequate satisfaction for both buyers and sellers. Regulated lower interest rates for the affordable housing segment, higher FSI, discounts or waivers in Stamp Duty and Registration and tax incentives for developers can bode well. Developers on the other hand may make only marginal profits on a single house but can make it up through volumes by developing townships or single societies in various areas.