Home Buying Guide – Part 04: Affordable Housing
With the Narendra Modi government’s initiative of providing housing for all by 2022, affordable housing has been the main focus area of the government’s plan. Affordable housing for the urban sector was approved by the Union Cabinet in June 2015 and is covered under the Ministry of Housing and Urban Poverty Alleviation.
The real estate sector is witnessing the positive impact of recent reforms and the emergence of the cost-effective affordable housing segment in India. The choice of lifestyle may differ but there is more demand in the market for smaller and better-designed homes than lavish layouts as the buyers want conveniences at an affordable price. Affordable homes make this segment more lucrative and attractive by providing cost-effective houses to the buyers.
Affordable housing seems to be the flavor of the season for developers also and they are more inclined towards building these projects. The government has given a big push to developers for affordable housing projects by granting “Infrastructure Status” to this segment. Now, those developers who were so far reluctant to enter into this segment are likely to be attracted by the easy access to capital at lower rates.
Definition Of Affordable Housing
Many of us may not be aware what does the term affordable housing actually stands for in the context of India’s real estate sector? Therefore, we should be careful while using the terms ‘affordable’ and ‘low-cost’ homes as both have very different meaning when it comes to their actual definitions. Every nation has a different definition of affordable housing so, it becomes essential to understand the actual meaning of affordable housing in India.
In fact, affordable homes are built with low-cost expenditure, keeping intact the high construction quality of the building. The reduction in the cost of these homes doesn’t allow the construction quality to deteriorate by preserving the contemporary standards of the building as compared to low-cost homes.
Affordable homes aimed at first-time home buyers of the middle and lower income groups who desire to own a house but due to their limited income do not find houses that can fit into their budget. These housing projects are typically located on the outskirts of metros and Tier-1 cities. The buyers of this housing scheme look for a home in a planned locality with proper sanitation, security, continuous electricity, water supply and better connectivity to places of work.
Classification of Affordable Homes
In fact, the affordable housing can be classified on the basis of the carpet size of a unit, its price and the income of a household.
EWS: For the Economically Weaker Sections (EWS), the affordable housing units are those measuring carpet area of 30 sq. meters (about 323 sq. ft) and priced below Rs 5 lakh.
LIG: For low-income groups (LIG), an affordable house would mean a unit measuring the carpet area of 60 sq. meters (about 646 sq. ft) and priced between Rs 7-12 lakh.
MIG-I: The middle-income group (MIG-I) comprises of households having an annual income of Rs 6-12 lacs. The units measuring the carpet area of 120 sq. meters (about 1292 sq ft) will come under this category of affordable homes. In this category, an individual will get a loan up to Rs. 9 lakh with an interest subsidy at 4 percent per annum.
MIG-II: In the second category of the middle-income group (MIG-II), a unit measuring the carpet area of 150 sq m (about 1614 sq ft) will come under the affordable housing category. The MIG-II comprises of households having an annual income between Rs 12-18 lacs and will get Rs 12 lakh home loan with 3 percent interest subsidy for a tenure of up to 20 years. The affordable homes are priced between Rs 12-50 lakh under the category of MIG-I and MIG-II.
The unit size is calculated on the basis of carpet area, which means the area enclosed within the walls of a house for which a buyer is required to pay when buying a home. This area does not include the thickness of the inner walls. However, the super built area is the rest of the portion including the balcony, lifts, corridors, lobbies, stairs, elevators, common areas etc.
The Prime Minister Awas Yojana (PMAY)
The Central government had laid out a clear vision to construct 20 million households by 2022 under the Pradhan Mantri Awas Yojna (PMAY) for the economically weaker section, lower and middlle income groups. The PMAY provides an opportunity to the people to own a house under the affordable housing scheme. The scheme also supports the acquisition of affordable homes from the secondary market through repurchase. Moreover, you may take a loan for the construction of the house under this scheme.
The PMAY linked loans can be availed from any primary lending institutions such as housing finance companies, State or Urban Cooperative Banks, Non-Banking Financial Company etc. The Union Budget of 2017 has significantly increased the allocation for the PMAY from Rs 15,000 crore to Rs 23,000 crore.
A married couple, either of the spouses or both together in joint ownership and an adult earning member (irrespective of marital status) can avail the PMAY benefits and will be eligible for only one affordable house respectively if they do not own a pucca house in their name anywhere in India. Besides, a beneficiary family should not have availed of the central assistance under any housing scheme from the Government of India.
However, all those who are already owning a home or any of their family member own a home, are kept out of this scheme.
Credit Linked Subsidy Scheme (CLSS)
Modi government has announced interest rate subsidies to those seeking to buy affordable houses under the credit-linked subsidy schemes. These subsidies will benefit a large number of buyers of affordable homes.
Under this scheme, those who belong to the economically weaker section and lower income group get an interest rate subsidy of 6.50 percent for loans up to Rs 6 lakh, middle-income category MIG-I gets an interest rate subsidy of 4 percent for loans up to Rs 9 lakh, and middle-income category MIG-II gets an interest rate subsidy of 3 percent for loans up to Rs 12 lakh.
Additional loans will be available at non-subsidised rates. Therefore, the total interest subsidy to be paid under the MIG group for a loan up to Rs 9 lakh is Rs 2.35 lakh and on a loan of Rs 12 lakh, it is Rs 2.30 lakh per beneficiary which will be paid upfront to the beneficiary.
Besides, if you are a first-time buyer, and are planning to buy a house costing less than Rs.50 lakh with a home loan of not more than Rs.35 lakh, you can claim an additional deduction of Rs.50,000, under section 80EE of the Income-tax Act, for interest paid on the loan. This is over and above the tax benefits, you get for availing a home loan under sections 80C and 24(b).
The most important stimulus provided by the government to the affordable housing has been granting of the infrastructure status to it. This will open the doors for easy funding at concessional rates of interest to the interested developers. Affordable housing developers will now be eligible for several government incentives, subsidies, tax benefits and most importantly institutional funding.
Lower rates of borrowing would help the builders to keep costs of their affordable homes in check and thus makes it a profitable segment.
GST Benefit: Affordable houses have been exempted from GST.
Developers’ Focus On Affordable Housing
The government has also announced various tax incentives to attract more established and prominent developers to build more compact and affordable houses. Now, the developers will get a period of five years to complete their housing projects instead of three years at present. Besides, the carpet area of the MIG-1 category of affordable homes has been increased from a unit size of 90 sq m to 110 sq m and from 110 to 150 sq m (about 1614 sq ft area) for the middle-income group (MIG-2). Besides, all major cities in their periphery locations provide ample opportunities for the development of affordable housing projects.
So, the developers have got significant boosts and consequently, many reputed and established developers who were traditionally in the luxury segment are moving to build properties under the affordable housing scheme. Affordable housing has, therefore, become an important segment in every developer’s portfolio and many more new projects are expected to be launched in this segment in the coming months.
An Attractive Investment Proposition For End Users
On the back of the new regulations which the Government has deployed to make Indian real estate a more credible and logic-driven market, end users are focusing heavily on the affordable housing market, as this is by far the most lucrative and attractive investment option for them. Moreover, putting a luxury house on rent does not yield good rental returns so, it makes more sense to live in one than investing in one mainly for rental returns. Besides, Home Finance Companies are lining up to provide loans under the PMAY. Moreover, it is the most incentivized segment for both developers and home buyers.
The demand for homes in the affordable segment has increased in cities due to a large migrant population. As a result, the demand in the affordable housing segment has shown an upward trend in the recent times in India. This segment is finally on a serious growth curve now with huge demand for housing in the middle and lower income groups where property prices are within Rs 50 lacs.
According to a report, there has been a supply of around 52 percent of the overall new units in the residential market of India by the end of the year 2017. Many developers have now shifted their focus towards the affordable housing segment and launching new projects across cities to push their sales. Moreover, the Government is also collaborating with private builders and developers under a public-private partnership model (PPP) to make Housing for All by 2022 a success. So, sales in affordable housing segment are going up as we are seeing more supply from developers.
Real Estate (Regulation & Development) Act, 2016 (RERA)
The government’s decision to implement The Real Estate (Regulation and Development) Act, 2016 (RERA) with effect from May 1, 2017, has infused fresh confidence into the real estate sector. Now, the interest of the home buyers will be legally protected by RERA and it also aims at ensuring timely completion of housing projects by the developers. Besides, the builders used to charge buyers on the super built-up area which will be removed by RERA by making the buyer pay only for the carpet area.
The impact of the affordable housing scheme in the real estate sector has brought some major changes both for the buyers and developers, making the entire housing process a transparent affair. So, the trend of cost-effective homes in the Indian realty sector is catching up fast as a positive impact of the affordable housing. With these policies to back them up, the buyers are easily getting their value for money houses.
Affordable housing is a new wave sweeping the real estate sector of India as it can change the face of home ownership in the coming future. In fact, it is being considered as the next big residential market in India. The demand for affordable housing units is steadily growing across all cities in India. Therefore, this segment is set to grow at a faster pace than the rest of the residential market in India in the coming future.
Ajay Verma, founder, and writer of The Housing World, a real estate and mortgage news website. He has over fifteen years of rich experience in the above-mentioned industries.