In India, unfortunately housing has still not been accorded the importance it deserves. Now is an opportunity to change this, says Deepak Parekh, Chairman HDFC
The housing shortage in the country is immense and the only way homes can become more affordable for the masses is by ramping up supply. Housing has multiplier effects on the economy -- it is a large employment generator and has strong backward and forward linkages with a number of other industries. At a time when India urgently needs to shore up growth, a focused approach towards housing may well lead the way.
To find the right solutions, there are a few fundamental questions that need to be answered:
- Why is the common man being out-priced from the housing market?
- Why do developers prefer to build luxury homes over affordable housing units?
- Why does India rank 182 out of 189 countries in terms of the ease of obtaining construction permits?
- Why can’t banks and housing finance companies be permitted to fund land transactions?
- Why does a developer need approvals from 40 to 50 regulatory or quasi-regulatory bodies for a residential building?
- Why is it that developers can never ever deliver homes on time?
- Why can’t state governments and authorities be made more accountable?
Is anyone listening?
Do the authorities understand the Plight, Pain, Trouble and Tension that a home buyer has to go through?
Few right decisions can reduce the cost of housing
Jiddu Krishnamurti, a philosophical writer aptly said: “If we can really understand the problem, the answer will come out of it, because the answer is not separate from the problem.” To my mind, the solution to these issues lies in putting in place an on-line, single window clearance mechanism for affordable housing projects.
Developers are often criticised for not relenting on the exorbitant pricing on residential homes. Part of the problem lies in how developers fund the purchase of land. Regulators prohibit banks and housing finance companies (HFCs) from extending finance to private developers to acquire land. Developers have to then resort to high cost funds from non-banking financial institutions, private equity and even from the informal sector, often paying interest rates ranging from 18 to 22% per annum. Even if a developer wishes to start construction immediately, approvals -- particularly in certain large cities, take as long as 18 to 24 months. Meanwhile, the developer needs to service the loan taken for acquiring the land, without receiving corresponding cash flows. Further, because of the multiplicity of approvals, speed money is demanded, often at every stage of approval. The end result is that all these time and cost overruns are eventually borne by the home buyer.
Understandably, if regulators feel there is excessive speculation in real estate, it is prudent to prohibit banks and HFCs from lending for land transactions. However, when there is no real estate bubble, as is currently the case, then banks and HFCs should be allowed to fund land transactions. This is because in property transactions, land costs comprise almost 70 to 80% of the total cost.
Though land is a state subject, a directive from the centre to ensure that all states move towards e-governance will go a long way. These are only administrative related issues. There is no need for legislative changes, so implementation is easily doable. A few states have already demonstrated that red tape can be cut as far as granting of building approvals are concerned. My back-of-the-envelope estimation is that transparency and timely approvals can reduce costs for the end consumer by almost 20%. So I ask again, why can’t housing be made more affordable?
On the other hand, developers must provide more affordable housing in the price range of Rs 15 to 40 lakh. They need to focus not on the high-end luxury segment, but on building more one and two-bedroom apartments, which is where the real need is. Even though margins may be lower, the turnaround time is much faster in the affordable housing segment. Affordable housing is a volume game, which is why the speed of obtaining approvals becomes more compelling. Admittedly, the central government’s most effective contribution to the middle-class has been the provision of fiscal incentives on both, the principal and interest component of a home loan.
The RBIwould do well to recognize that priority sector housing loans up to Rs 25 lakh in metropolitan cities and Rs 15 lakh in other centres is unrealistic when inflationary and other cost escalation factors are considered. Priority sector housing loans should be increased to at least Rs 40 lakh per unit.
The state of our cities will determine India’s future. While the vision of creating 100 new cities with smart connectivity is laudable, we also have to remember that focus is equally needed on making our existing cities more livable. Urbanisation is a double-edged sword – it can help raise the standard of living of millions, yet inaction could plunge cities into further chaos and mayhem. Good leadership is about prioritisation: securing India’s urban future should be one of them.
The new government has to simultaneously work several levers – increase growth, reduce the fiscal deficit, contain inflation, create a conducive investment climate for both, domestic and foreign investors and work towards improving hard and soft infrastructure. It has to fulfill the aspirations of its people – particularly the young, who seek better jobs and a higher standard of living. Foremost among the aspirations of our people is that of being a home owner.