We’re witnessing the birth of a low-income housing market in India. According to a World Bank study, 25,000 units priced under ~US$20,000 were launched between June 2010 and November 2011. Twenty-five percent of those units were under ~US$10,000. This development has been fostered by a large number of social entrepreneurs, non-profits and consulting organizations:
- Monitor Inclusive Markets has done extensive research and developed a business model for low-income housing.
- Eight Indian housing finance companies (HFCs) have figured out how to effectively provide micro mortgages to households with no formal credit histories at affordable interest rates.
- Niche developers such as Janaadhar, DBS and Foliage, and big corporate houses such as Tata have developed housing solutions that cater to the low-income housing market segment.
- Innovators such as WorldHaus have developed low-cost housing technologies suited to the Indian housing market.
Amazingly, progress toward a sustainable market-based solution to India’s housing crisis has been achieved with little to no government subsidy.
But addressing the nation’s housing shortage, conservatively estimated at 25 million (including some 17 million slum dwellers), also means addressing significant challenges that will require government to step up. These include:
- A byzantine maze of government approvals that can thwart low-income housing development
- Lack of cheap land that pushes low-income housing developers to the outskirts of cities
- A higher than expected cancellation rate, which negatively impacts low-income housing developers’ bottom lines
- The rising costs of labor and raw materials, which push prices up and impact the affordability of new homes
- The lack of low-cost debt, which constrains HFCs in much the same way it constrains microfinance organizations
- The ability to reach low-income families, who are typically less informed of and less ready to act on the availability of financing options and low-income housing stock
The role of government
India’s urban poor are desperately short of viable housing solutions. The lack of infrastructure in slums leaves tens of millions of children vulnerable to a raft of easily preventable but deadly diseases. Slum residents have few legal housing rights, and people moving to India’s urban centers for work have few options. Moreover, the urban housing crisis is accelerating: McKinsey has estimated that India’s urban population will be around 590 million people by 2030, nearly double what it is today and nearly double the current the population of the US.
While the scale seems daunting, we firmly believe that India’s housing crisis can be addressed. The central government has actively engaged in the low-income housing space, allocating substantial funds to help spur market-based solutions. In 2006, the massive Jawaharlal Nehru National Urban Renewal Mission (JNNURM) kicked off with a goal of injecting US$20 billion into urban areas within seven years. Launched in 2011, the Rajiv Awas Yojna (RAY) was explicitly set up to address the low-income housing crisis. The initiative challenges state and city governments to design public-private partnership models to create slum free cities. In Phase 1, RAY has allocated approximately US$1 billion (Rs. 5000 crore) for pilot projects over a two-year period. Based on the results of those pilots, another roughly $10B (Rs. 50,000 crores) will be allocated as part of a five-year Phase 2.
With RAY, the government has acknowledged the critical role the private sector needs to play. The challenge now is creating a policy framework that creates the right incentive structures for market actors. If implemented correctly, current government initiatives will provide the shot in the arm that today’s nascent low-income housing market needs to firmly establish itself. The hope is that RAY Phase 1 pilots will demonstrate which approaches work and which don’t, thus providing guidance that will help ensure Phase 2 partnerships are successful.
Since success in this space is anything but a given, these pilots are critical. The industry has already encountered some knotty issues — for instance, the unexpected challenge of getting low-income families into new units. One surprise was the fact that middle and the investor classes have sought to snap up these new properties. Another has been a mismatch between the type of housing that can be affordably built and the aspirations of low-income, first-time home buyers. (280 square feet? We wanted a bigger home!)
A multitude of needs
The reality is that, no matter how the market unfolds, a one-size-fits-all approach won’t work. A robust housing solution must address the multitude of housing preferences amongst India’s urban poor. There is a need for a portfolio of housing solutions that encompasses slum redevelopment, rental housing, and urban dormitories as well as greenfield construction. There’s also an ongoing need for slum revitalization.
Most importantly, as these public-private partnerships gain steam, we must remain vigilant about unintended consequences and aware of the real stakes: People’s homes. The challenges the sector has encountered to date reflect a need that the government and housing advocates must confront sooner rather than later: The criticality of crafting a policy framework that encourages not just growth of the nascent low-income housing sector, but that also provides the right protections and supports for the people it’s intended to help.
For more on how on HFC provides low-income families with micro mortgages, read this case study on Micro Housing Finance Company (MHFC.)