Source : Business Times – 15 Jul 2009
And there’s no reason why banks can’t extend housing loans to slum dwellers for well-built replacement homes
ONE of the distressing features of Indian cities is the widespread prevalence of slums in which people are forced to live because of poverty and the indifference of the ruling elites.
This may soon change. For one, developers find that under the present market conditions, the premium housing they concentrated on so far has few takers and the only way out is mass or ‘affordable’ housing.
Moreover, the government hopes to boost a sagging growth rate by construction of cheap housing. And banks, which are flush with money but are reluctant to lend it, could be persuaded to do so if the mortgages are safe.
Though the real estate industry is currently estimated to be worth US$48 billion, around 5 per cent of GDP and growing at 30 per cent annually, in recent months developers have found it difficult to dispose of offices, malls and premium homes.
While the current housing shortage is around 25 million homes, mainly in the middle- and low-income groups, developers have concentrated on building for the upper- and upper-middle-income groups since profit margins for these homes are higher.
Faced with a demand crunch and with prices falling as much as 30 per cent from their peaks, the buzz now is about ‘affordable housing’.
The government also sees mass housing as a way to boost sagging GDP. Kamal Nath, a minister in the central government, said in a recent interview: ‘We have to look at construction of cheap housing, mass housing – this will drive the construction sector. It is by these stimulus packages of creating domestic-driven growth packages, creating a domestic investment-driven model that I think we can hope to go back to a growth trajectory of 8 per cent.’
Because of low offtake, banks have parked 1.1-1.2 trillion rupees (S$33-36 billion) with the Reserve Bank of India (RBI) in the last two months alone. Much of this could go into the construction sector if proper policies are formulated.
Estimates made by the prestigious Indian Institute of Management (IIM) Ahmedabad say that 78 per cent of all money spent on construction gets added to GDP. There are backward and forward linkages with over 250 industries and services like cement, steel, bricks, electricals, wood and glass, plumbing, furniture, security and maintenance services among many.
A back-of-the-envelope calculation shows that a construction programme of 2.5 million low-income houses a year – enough to take care of the demand backlog over 10 years – would add around one per cent to GDP growth. But there are several challenges to be faced.
A major one is the high cost of urban land. Deepak Parekh, chairman of India’s largest mortgage bank, HDFC, stated in the latest annual report released recently: ‘The real agenda for affordable housing has still not been brought to the table . . . affordable housing is not about box-sized, budget homes in far-flung places where there is no connectivity to work places and little surrounding infrastructure. The inability to adjust land policy with the changes in demand-and-supply conditions has led to serious shortages of urban land at affordable prices.’
As a result, most recently announced mass housing projects such as the one by Tata Housing are located in remote places far from places of employment. In cities like Mumbai, the problem of rehousing slum dwellers is faced by making it worthwhile to build free homes for existing slum dwellers, and this is cross-subsidised by building apartments for sale on the land.
But this becomes worthwhile for developers only where the land price is sufficiently high to cover the cost of free houses.
For the slum redevelopment schemes to really take off, their residents should ideally pay for the cost of constructing their houses (the standard 225 square foot house given to such people would cost around 200,000 rupees to build) as it would reduce the cross-subsidy and allow more affordable homes to be built.
Gautam Chatterjee, CEO of Maharashtra Housing and Area Development Authority (MHADA), the nodal agency for slum housing in the state, says: ‘Slum dwellers have been pampered with free housing and so don’t want to pay the cost price for replacement housing. If they are given bank loans like the middle class, there will certainly be a demand for replacement houses that they pay for.’
‘Ideally, the state governments should be building houses but they are all heavily in debt and don’t have the money. The only sustainable way is to make the slum dwellers pay for the new housing, and banks must be involved to give them loans,’ adds VK Pathak, a well-known urban planner. ‘Now, because of competitive politics, slum dwellers do not pay for new housing – if one ruling party asks for payment, the opposition says ‘we will give you free housing’.’
Giving loans to slum dwellers requires a structural shift in thinking. There is no reason to think they are any more a risk than the millions of middle-class buyers of homes, but the banks won’t touch them.
The mortgage market in India is still very small, with a lot of space for expansion. For instance, home mortgage as a percentage of the country’s GDP is only 4 per cent in India – compared to 18 per cent in Thailand, 23 per cent in Malaysia, and 68 per cent in Singapore.
Floor space index
Another major impediment is the cost of land. In cities like Mumbai, the floor space index (FSI) or ratio of built up area to land area is just 1.33, when it could easily be 4 or 5 if sufficient investment was made in infrastructure like roads and rail transport, parking spaces, drainage, water, electricity and public amenities like schools, hospitals, parks, etc.
It would also be necessary to bring additional lands into urban areas, which comprise 2.3 per cent of the country’s area but house over 30 per cent of its population, by making it easier to convert agricultural land to urban use.
Pranay Vakil, chairman of property consultants Knight Frank India, says: ‘A higher FSI of 4 or 5 would release land for construction. Besides, there are over 6,000 acres (2,430 hectares) of salt pan lands around Mumbai, much of which could be released since they no longer produce any salt.’
Mass housing for low-income families is a worthwhile idea that has many benefits for the economy and poor families, but it will require strong political will.
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