Are affordable rentals a solution to housing shortage in India

The 12th Plan working group on financing urban infrastructure estimates the housing shortage in the country at nearly 29 million units. Most worrisome is that about 26 million units pertain to the economically weaker sections or EWS (household average monthly income up to Rs 5,000), whereas the shortage in the low income group, or LIG, (household average monthly income of Rs 5,000-7,500) is three million. An inadequate supply of affordable housing is a key reason why at least half the residents in larger metros live in slums or other informal accommodation.

To date, government housing policy has focused on home ownership with little success. In contrast, many developed economies have emphasized affordable or “social” rental housing, which constitutes up to 20-30% of their housing stock. Most of the social housing is provided by the government or by associations that utilize government incentives.

Indian scenario

In the two decades post Independence, housing policy focused on handing over finished housing units to EWS or LIG families. Only a small fraction of the country’s total budget was allocated to housing programmes and since this intervention was costly it benefited very few. Where market value of the units was high, many low income families preferred to sell off the assets to middle and higher income groups (MIGs and HIGs).

By the 1970s and 1980s, the government turned its attention to enabling, not providing, home ownership by using sites and services and slum upgrading programmes. These required beneficiaries to contribute some of their own capital. The outcome from these were also poor as the serviced sites were generally in peripheral areas and more suitable for MIGs and HIGs who bought them off LIG families.

From the 1990s, enabled by the growth of the housing finance industry, the government increasingly sought to incentivize the private sector to build LIG housing stock using floor space index (FSI), tax exemptions and other tools. While this approach reduced government’s outlay, the emphasis on ownership remained. Greater availability of finance benefited construction companies and aspiring MIG and HIG homeowners.

Why is rental housing important?

Low income households can’t afford to buy homes and cannot get home loans due to lack of credit history. Smaller, monthly rent payments suit their variable income profile.

For the government, subsidy outlays for rental housing, such as on rental allowance, is lower than subsidizing house ownership. Then the housing asset remains with the government so it can be used by multiple households over time. The majority of low income persons in urban areas end up renting accommodation in the informal sector under a variety of arrangements.

Edited excerpts from a report by IDFC. Comments at mintmoney@livemint.com

Also See | Social Rental Housing In Developed Countries (PDF)