For affordable housing to take off, the old way of thinking needs to be junked - The Daily Reckoning

For affordable housing to take off, the old way of thinking needs to be junked

Feb 20, 2015

- By Vivek Kaul

Vivek Kaul
More and more Indians are migrating to cities. As the Economic Survey for 2013-2014 points out: "Nearly 30 per cent of the country's population lives in cities and urban areas and this figure is projected to reach 50 per cent in 2030."

What this means that our cities will need more homes for people to live. And these homes need to be "affordable" unlike the homes being currently built, which are way beyond what most people can afford. "The present urban housing shortage is 18.78 million units of which 95.6 per cent is in economically weaker sections (EWS) / low income group (LIG) segments and requires huge financial investment," estimates the Economic Survey.

This is something that needs to be addressed if our cities are not to turn into slums (not that they aren't already). Take the case of Mumbai where the percentage of population living in slums has gone up dramatically over the years.

As Alain Bertaud writes in a 2011 research paper titled Mumbai's ill conceived Malthusian approach to development: "In spite of its economic dynamism and affluence, about 55% of Mumbai's inhabitants live in slums, and this proportion has been increasing over the last 20 years. In 1971, Mumbai slums contained 1.32 million people representing 22% of the population. In 2001, the slum population had grown to 6.6 million representing 55% of the total city's population!"

The number could have only gone up since then.

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In fact, Bertaud also points out that floor area per person in Mumbai is one of the lowest in the world. As he writes: "With an estimated average of about 4.5 m2 per person in 2009, the consumption of residential floor space in Mumbai is one of the lowest in the world and would be expected from a city in a desperate economic situation."

In comparison, the situation in a city like Shanghai has improved by leaps and bounds over the years. As Bertaud writes: "As a comparison, consider Shanghai in 1984: recovering from more than 10 years of Cultural Revolution, it had a floor area per person of 3.6 m2. Shanghai's Municipality considered that rapidly increasing floor consumption was to be the city's first priority, and by 2010, the average floor space consumption in Shanghai was 34 m2/person."

Hence, India has a long way to go when it comes to affordable housing as well as ensuring that an adequate amount of space is available per capita. This is something that needs to be done sooner rather than later.

As Akhilesh Tilotia writes in his new book The Making of India: "As much as 70 per cent of the urban housing shortage arises from the bottom four deciles of households whose ability to pay is severely constrained." Tilotia does some maths to tell us that the buying capacity of such households is capped at Rs 5-10 lakh This price comes with the assumption that households of five members can crowd into spaces of between 250-400 square feet. When you compare this with the average price of a flat in most of the big Indian cities, you realise the mess that we are in.

So what is the way forward? There are three things that need to be done. Larger land area needs to be made available on the periphery of cities. This needs to be connected to the commercial hubs in various cities through fast and cheap transport. And at the same time, FSIs need to go up, so that the land that is made available at the periphery of cities, can be made more productive.

Tilotia writes that there is a lot that India can learn from the South Korean experience. In the mid 1980s, the number of homes to the number of households was only 70% in South Korea. This led to very high prices. Roh Tae-woo became the President of South Korea in February 1988. He won the presidency largely on the promise of creating 4 million new homes. This was a huge number given the existing base of homes was around 6 million.

This number of new homes was later scaled down to 2 million. Of this, 0.9 million homes were built in and around the capital city of Seoul. "A quarter of million units were allocated for low-cost housing. Notably, the project relied heavily on private capital financing: 67.7 per cent was provided by prospective buyers through pre sales, 22.3 per cent by loans from the National Housing Fund and only a minor portion (around 10 per cent) came from the government," Tilotia points out.

Acquiring land proved to be a major challenge in this project. The situation is not going to be any different in India, if an idea like this is tried.

Most of the land on the periphery of our cities is agricultural. As Tilotia writes: "Cities can expand more easily if the landowners are able to benefit from this value transition. This requires two critical things to fall in place: (1) clear and enforceable title to land (2) easy tradability...Easy tradability requires that the state does away with artificial distinction of what is agricultural land and what is not."

Of course all this is easier said than done. Nevertheless, if affordable housing has to become the order of the day, an institutional solution needs to be found and the government has to take some interest in getting things going and ensuring that builders don't take everyone else for a ride, as they have until now.

Further, it is important that the government comes around to the idea that more and more people will move to cities in the years to come. As Bertaud writes: "The main goal of the regulatory policy has been to control the size of Mumbai by penalizing any type of new development, fearing that economic success would attract more people who would then have to share an already deficient and immutable infrastructure."

What is true about Mumbai is also true about other big Indian cities. This thinking needs to be junked, given that it is a very pessimistic way of thinking. "The development of cities like Seoul, Shanghai, Hong Kong and Singapore prove that with the right policy and management, cities are able to grow rapidly while constantly improving their infrastructure and their environment. Mumbai already has the talent and the entrepreneurs; there is no reason to be afraid of urban growth and to freeze the spatial development of the city anymore," writes Bertaud.

If affordable housing has to become a reality, this should be the way forward.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

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5 Responses to "For affordable housing to take off, the old way of thinking needs to be junked"

G S Apte

Feb 22, 2015

Article is good and highlights the fact that, 50% people would be staying in cities by 2030. We need to add more cities to accommodate such huge population, not just expanding the current cities.

Government should do the following to address this scenario:
1. Prepare and Follow a uniform housing policy across India.
2. Prepare a framework using which the prices of houses should be decided based on, cost of raw material and cost of construction and labor cost and encourage builders to sell these houses at these rates, and not at some hypothetical rates as it is today.
3. All builders should declare their profits and losses on quarterly basis, since it is an industry like any other organization.
4. Build around 100 new cities in India, near to existing cities.
5. Use the existing laws to ensure that, illegal constructions are not formed and legal constructions are given incentives, so that more and more legal houses can be developed.
6. Build world class infrastructure and roads and trains to allow people to travel in 30-45 minutes to their job, so that productivity of people is high, and it would result into higher efficient man power.
7. Study the model of cities like Seoul, Shanghai, Hong Kong and Singapore and implement that model in 100 cities of India. Our talent and knowledge is equally superior as in these cities and there is no reason why we can do it in India.

This could be just the beginning and with large pool of talented people in India, it is definitely possible to solve the housing problem ahead of us.


yogendra pal singh

Feb 21, 2015

Where is the solution, my dear Vivek Kaul?


Sarat Palat

Feb 20, 2015

Nice article and an eye opener. It is not good for India to have slums whose inhabitants are on the rise. If the situation continues today it is in Mumbai, tomorrow it could be in other major cities. This is mainly because of unchecked population growth. We should have a population policy through which we could check the population growth. This is the only way through which we could reduce the gap between the have and havenot over a period of time.


Dharmendra kapur

Feb 20, 2015

Good one Vivek saheb. One point we need to be careful about using the peripheral land (which is agricultural) for residential buildings is that is effects the prices of vegetables. We have seen this around Delhi where a lot of buildings have come up on land which used to be a source of supply of vegetables. Catch 22 situation. We are waiting to see how the Delhi government will tackle this.


vipul jasani

Feb 20, 2015

In my opinion all these are absurd suggestions. The word " Affordable housing " is shame on humankind.

No one is writing about how to prevent speculation and avoid policies that are meant to benefit banking system and made people financial slaves for years!!!


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