Shortage of low-cost homes? Affordable housing a Rs 67 lakh cr opportunity

The projected demand for 30.7 million affordable housing units by 2030 presents a massive opportunity to address one of the country's most pressing social challenges

India is staring at a massive affordable housing shortage, with demand set to reach 30.7 million units by 2030, according to property consultant Knight Frank’s latest report. The total financing opportunity for this growing segment is estimated at Rs 67 trillion, driven by urbanization, increased employment, and rising income levels. 

 

The majority of demand (95%) will come from urban centers, especially for economically weaker section (EWS) households. Despite this, funding inflow has remained limited, posing significant challenges to developers and policy makers. The report also highlights the need for policy reforms to bridge this gap, such as revising loan eligibility criteria, providing tax incentives, and unlocking unused land. Addressing these gaps will not only ease the housing crisis but also boost economic growth in the country.

 

 

As per Knight Frank's analysis, led by factors such as urbanisation and employment opportunities, 22.2 million units of housing will be required in urban centres in India. 95.2 per cent of this demand, which is equivalent to 21.1 million units, will be concentrated in the affordable housing segment. A predominant share of 45.8% of the demand will be concentrated amongst the EWS households. There is already an existing shortage of 10.1 million units.  

 

According to the analysis by Knight Frank India, the cumulative affordable housing demand in India is projected to reach 31.2 million by 2030, with the market size estimated at Rs 67 lakh crore. 

 

The current portfolio of the affordable housing loan market in India is estimated to be Rs 13 trillion, with Housing Finance Companies (HFCs) constituting Rs 6.9 trillion and Scheduled Commercial Banks (SCBs) holding a share of Rs 6.2 trillion. The loan market in this category is anticipated to experience significant expansion due to the escalating potential demand for affordable housing. 

 

The reliance on loans is notably high in the affordable housing segment as compared to premium in India. Based on an assumption of a 77% loan dependency and Loan-to-Value (LTV) ratios applied at various loan thresholds, the potential financing opportunity for banks and Housing Finance Companies (HFCs) in the affordable housing segment is estimated to be Rs 45 trillion.

 

Assessment on financing opportunity for banks and HFCs for affordable housing consumer loans 

 

Between 2011 and September 2024, the affordable housing segment attracted capital inflows of $1.6 billion. This represents just 9.8% of the total capital directed towards the residential sector and a mere 3.6% of the overall real estate sector inflows. Foreign investments in affordable housing remain low, comprising just 15% of the total private equity inflows in this category. This lack of sufficient capital from private investors, especially foreign investors, has hindered the growth of affordable housing projects, leaving much of the financing burden to local banks and housing finance companies.

   

Mismatch in categorisation of affordable housing

The Ministry of Housing and Urban Poverty Alleviation (MoHUA) refers to affordable housing as residential units that are reasonably priced for individuals with incomes below the average household income. MoHUA targets economically weaker sections (EWS), low-income groups (LIG) and middle-income groups (MIG). The beneficiary criteria are set as follows: 

 

These definitions serve as a foundation for determining which households qualify for various government benefits under PMAY-U. "However, a disconnect persists between policymakers' definition of affordable housing and the realities of the current residential market. The average cost of units in the affordable housing segment has risen considerably compared to the pre-pandemic levels of 2019, affecting affordability for homebuyers, particularly those in the EWS category.

 

In Mumbai city, the average launch price of an affordable housing residential unit has increased from an Rs 4.8 million to Rs 7.3 million in 2024. This indicates the price of the affordable housing units beyond the threshold set by the RBI under priority sector housing," noted the report. 

 

Similarly, at an overall scale, there has been a disproportionate price rise with smaller housing units witnessing a significant surge vis-à-vis larger units. For instance, in the MMR region, the average price of a residential unit with an area under 30 sq m increased by 55% between 2019 and 2024 (until September), whereas the average launch price of a residential unit with an area of 60-160 sq m has increased by 29% between 2019-2024. Therefore, the affordability of a EWS household has been significantly depleted. 

 

As per Knight Frank estimates, the home loan EMI/Income ratio of the of a household with an annual income of Rs 3 lakh per annum has increased from 43% in 2020 to 62% in 2024, indicating a 19 per centage points increase. This escalation is a consequence of the combined impact of interest rate hikes and price rise. Notably, this ratio exceeds the Fixed Obligation of Income Ratio (FOIR) limit of 50% established by the banking sector in India, thereby constricting the scope of home loan borrowings for the EWS homebuyers. 

 

In contrast, the EMI/income ratio of a household above the MIG category with an annual income of Rs 1.2 million, has increased by 13 percentage points, rising from 28% to 41%. And the affordability as well continues to remain within the FOIR limit established by the banking sector, providing easy access to financing for home purchases. 

 

An EWS household with an annual income of under Rs 3 lakh would find it challenging to avail this loan as the EMI requirement is above the FOIR limit set by the banks.

 

"To enhance the accessibility of affordable housing schemes, particularly for EWS households, it is essential to revise the income eligibility criteria. Currently, the EWS category is capped at an annual income of INR 0.3 million, whereas the income needed to purchase a 30 sq. mt. home in tier-1 cities is estimated at INR 0.6 mn. Such revisions should be tailored to specific geographies, accounting for their cost of living," noted the report.

 

 RBI's definition of affordable housing, linked to priority sector lending, requires an update. 

At present, home loans qualify as priority sector lending if the unit price is under Rs 4.5 million in metro cities and Rs 3.5 million in non-metro cities. However, since the RBI's last revision in 2019, housing prices have increased significantly. Adjusted for consumer price inflation (CPI), the average house price in metro cities has risen from Rs 4.5 million in 2019 to Rs 5.7 million in 2024, while in non-metro cities, it has grown from Rs 3.5 million to Rs 4.4 million during the same period. 

 

The growing housing demand 

The demand for affordable housing in urban areas has intensified in recent years due to factors like rapid urbanization and the migration of people from rural to urban settings. Rising job opportunities in the manufacturing, service, and tech sectors, along with increasing incomes, have compounded the demand for homes, particularly in metro cities where real estate prices are soaring. As more people from lower-income groups move into cities for work, their need for affordable homes becomes even more pressing.

 

The report suggests that households in the EWS category would need an annual income of Rs 0.6 million to afford a 30 square meter home in a tier-1 city, far beyond the current threshold of Rs 0.3 million.

 

Addressing the Supply Shortage

To meet the growing demand for affordable housing, Knight Frank suggests a number of policy measures aimed at stimulating supply. Among these, unlocking unused land owned by public sector undertakings (PSUs) could provide developers with cheaper land, reducing construction costs and ultimately lowering the price of housing units. As per Knight Frank's estimates, India would require 1.9 lakh acres of land to build the projected 31.2 million affordable housing units.

 

Furthermore, increasing the free Floor Space Index (FSI) or Floor Area Ratio (FAR) in urban areas could help developers build more homes in the same space, which would lower construction costs and increase supply. The report proposes that increasing the free FSI by 50% could raise housing supply by 50% and reduce construction costs by 24%.

 

Tax incentives for private developers are also essential to make affordable housing projects more financially viable. Currently, tax breaks are limited to income tax waivers on profits for one year, but Knight Frank suggests that more comprehensive tax incentives, such as subsidies and GST rebates, are necessary to attract private developers into the affordable housing sector.

 

The Need for New Satellite Cities

To alleviate the pressure on overburdened metro cities, the development of new satellite cities is another solution proposed by Knight Frank. These cities, which include Panvel and Vasai Virar in Mumbai, Manesar and Sohna in Delhi NCR, and Hoskote and Devanahalli in Bengaluru, could serve as more affordable alternatives for middle and low-income groups. Early-stage development in these areas should focus on creating affordable housing by using land use planning and zoning regulations that prioritize the construction of affordable homes.

 

With the manufacturing sector set to grow significantly, Knight Frank highlights the emerging need for industrial workers' housing. As India’s manufacturing output is expected to rise from $491 billion in 2023 to $975 billion by 2030, the demand for housing, particularly rental housing, is expected to increase. A rise in contractualization and employment in the manufacturing sector will generate the need for affordable housing for workers, creating a new opportunity in this segment.