Affordable Homes for Middle and Low Income Groups: Mumbai

With reports of illegal constructions and resulting building collapses, it is essential for the government to come up with stringent policies and work closely with land developers in order to provide affordable housing for low-income groups. The low-income groups are specifically compelled to live in poorly constructed illegal houses which eventually lead to building collapse and tragedies. This compulsion arises due to various economic, regulatory and urban factors. Rising land costs, unavailability of land for the growing population and lack of access to home finance are just few of them.

Here are some of the factors that are making access to affordable houses difficult. These factors must be taken into consideration by the government and real estate developers so that affordable housing can be provided.

1. Lack of land availability

The population density of Mumbai has increased over the last decade. With increasing population density, the demand for land has increased. However, due to limited land availability, the land prices are much higher than the prices that can support real estate development.

The government can use the Public Sector Undertaking (PSU) and the Public-Private Partnership (PPP) to make more land available. In the PSU format, the government already owns lands but most of these lands are idle. This land can be made available for construction of residential property. The only cost the government would incur would be the construction cost. It can take advantage of additional Floor Space Index (FSI) ratio. This will not only reinvigorate the real estate sector but will also pull down prices.

The government can also introduce policies for making land available at concessional prices or creating special housing zones similar to the SEZ concept.

2. Costs of construction

Though the land rates are lower in the peripheral locations compared to the rates within the city limits, the total cost of construction is due to the high costs of building material such as steel, cement and labour. For example, the rate of land in the peripheral area may be Rs. 250 per sft. But the cost of construction material may come up to Rs. 1,000 per sft. Hence, the minimum selling price of the project may be Rs. 1,500 – 1,700 per sft. The cost of construction is also sometimes impacted by the infrastructure costs such as transportation costs.
For developers who are developing land in far-away suburbs, the government must develop proper civic infrastructure.

3. Limited access to housing finance

Getting housing finance to make a purchase at distant suburbs is a challenge. About 65-70 percent of workers in Mumbai work in the unorganized sector and their salaries are paid in cash. This affects their chances of securing a bank loan due to the lack of availability of sufficient documents of identification. Hence, this section of the society receives limited help by the Housing Finance Companies (HFC).
Another problem is that the RBI guidelines do not favour the housing industry. The cost of housing finance is high. The RBI must recognize housing as an industry and provide cheaper housing finance at lower rates of interest.

4. Lack of clarity of information

Buyers usually face multiple problems related to transparency of transactional information. Though land records can be acquired through the department of registration, the process is cumbersome taking a lot of time and money. The transaction prices mentioned in the registration document also may not represent the actual transaction costs. Furthermore, a large segment of intermediaries that deal with buyers are neither certified nor professional brokers. Hence, the buyers lack access to information about options and have to deal with a largely unorganized sector for their transactions.

5. High Taxation

Apart from the high land and construction costs which make homes expensive, taxes are other major contributors for expensive housing. According to experts, taxes account to about 40 percent of the selling price of a house. The government must encourage affordable housing by eliminating or reducing stamp duty, custom excise and transaction costs and providing additional FSI and Floor Area Ratio (FAR).

6. Regulatory Constraints

Another factor that affects real estate development is the efficiency of Urban local bodies which deal with city planning and regulate controls on development. Getting a plan sanction for a project is a major hurdle a developer faces. The developer needs to visit ten different departments and the process is so cumbersome that it takes at least two to three years to commence construction from the day of entering the agreement for land purchase. There is still no single window clearance system, a proper coordination between various authorities or any reforms in approval process.

7. Greater FSI and FAR

Affordable houses also need some relaxation in FSI. Developers in Mumbai currently get a FSI of one or a little higher in some cases. This is nowhere sufficient to create affordable houses for all. An MoU signed in 2010 between the government of Maharashtra and MCHI for creating 10 lakh affordable homes through various schemes such as PPP and slum redevelopment is still on paper without any real implementation.

In essence, the costs of creating affordable houses for everyone are high and the process is cumbersome. It is only illegal constructions at the moment which are providing cheap housing. Unless the government comes up with policies and regulations, and works closely with the private sector, illegal constructions will collapse leading to tragedies