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Housing Problems
*Dr. S.N.Yogish

Introduction: India is home to over 1.1 billion people. With about one in every sixth person in the world living in India, housing perforce assumes significant importance. Successive Indian governments have regarded housing as a primary need of its people. The need to provide affordable housing has been the reason behind state interventions in the sector. Housing policies, however, tended to be framed by the government from a social rather than economic perspective. Despite explicit recognition of the need for housing, housing programmes received low public investment. Housing and subsidies were largely synonymous and hence the tendency to view housing finance from the angle of the governments cash budget and not as a developmental activity with tremendous spin-offs to the economy. A significant trigger of change in housing policies in India occurred pursuant to the global shelter strategy adopted by the United Nations (UN) countries to establish comprehensive, multi-faceted housing programmes to provide shelter for all. The Global Shelter Strategys main aim was to ensure social, economic and environmental sustainability while simultaneously upgrading living conditions. A defining feature of the resolution was that it sought to involve national governments, private bodies as well as nongovernmental organizations in formulating housing programmes. This provided the impetus to the Indian government in drafting its first National Housing Policy, which was tabled in Parliament in 1992 and adopted in August 1994. Subsequently, with a national agenda of shelter for all, a new housing and Habitat Policy was adopted in 1998. This proved to be a watershed with the governments recognition that it should withdraw from direct participation in the housing and housing finance sector and instead take on the role as facilitator, thereby creating an enabling environment to encourage private sector capital.

Reader, Department of Economics, Kuvempu University,

Shankaraghatta. In 2000, UN members adopted eight millennium Development Goals ranging from eradication of poverty to developing a global partnership for development. For housing though, it was the seventh goal that would prove to be important. Goal 7 called for ensuring environmental stability and assigned UN-HABITAT the responsibility of assisting states to monitor and gradually attain the cities without Slums target, popularly known as Target 11. This target calls on member states to achieve a significant improvement in the lives of at least 100 million slum dwellers by 2020. For India, this will prove to be daunting. In 2001, Indias population estimated to be living in slums was 61.8 million (Ministry of Urban Employment, 2005). Survey of Housing Indicators: List of 52 urban centres and countries included in this paper: *. Cities from low-income countries: Dar es Salaam, Tanzania, Lilongwe, Malawi, Dhaka, Bangladesh, Antananarivo, Madagascans, Ibadan, Nigeria, Delhi, India, Nairobi, Kenya, Beijing (Peking), China, Karachi, Pakistan, Accra, Ghana. *. Cities from low-middle-income countries: Jakarta, Indonesia, Cairo, Egypt, Harare, Zimbabwe, Dakar, Senegal, Manila, Philippines, Abidjan, cote dIvoire, Rabat, Morocco, Quito, Ecuador, Amman, Jordan, Bogota, Colombia. *. Cities from middle-income countries: Bangkok, Thailand, Tunis, Tunisia, Kingston, Jamaica, Istanbul, Turkey, Warsaw, Poland, Santiago, Monterey, Mexico, Algiers, Algeria, Kuala Lumpur, Malaysia, Johannesburg, South Africa. *. Cities from mid-high-income countries: Caracas, Venezuela, Rio de Jameiro, Brazil, Budapest, Hungary, Bratislava, Slovakia, Seoul, Republic of Korea, Athens, Greece, Tel Aviv, Israel, Madrid, Spain, Singapore, Hong Kong.

*. Cities from high-income countries: London, United Kingdom, Melbourne, Australia, Amsterdam, Netherlands, Vienna, Austria, Paris, France Toronto, Canada, Washington, D.C., United States, Stockholm, Sweden, Tokyo, Japan, Helsinki, Finland, Munich, Germany, Oslo, Norway. Habitat Housing Indicator: Housing Tenure: Income Grouping: Cities in: % of dwelling Units Owned by Low-income countries Low-middle-income countries Middle-income countries Mid-high income countries High-income countries Housing Quality: Income Grouping: Cities in: Low-income countries Low-middle-income countries Middle-income countries Mid-high income countries High-income 35.0 0.66 100 100 22.0 1.03 99 99 15.1 1.69 94 94 Floor area per person (M2) 6.1 8.8 2.47 2.24 Persons per room % of permanent units structures 67 86 % of dwelling with water connected 56 74 occupants 33 52 59 55 51 % of dwelling units Public Housing 13 11 14 53 13 % of Total unauthorized housing stock 64 36 20 3 0

countries Government expenditure: Income grouping: US $ Cities in: Low-income countries Low-middle-income countries Middle-income countries Mid-high income countries High-income 304.6 813.5 40.1 31.4 Per person 15.0 Cities in: Sub-Saharan Africa South Asia East Asia Lat Am/Caribbean Eastern Europe, Greece, N Africa/ Middle East W Europe, North America and 656.0 86.2 Per person 16.6 15.0 72.5 48.4 US $ Regional grouping:

countries Australia Source: Global Report on Human settlements 1995. Role of Housing: Macro economic stability and the housing sector are inextricably linked. It is estimated that for one Indian Rupee (Rs.) invested in housing; Rs. 0.78 gets added to the gross domestic product of the country. The housing sector has strong backward and forward linkages to over 250 ancillary industries. After agriculture, the housing and real estate industry is the second largest employment generator. It is estimated that the construction sector provides direct employment to 16 per cent of the countrys workforce, which is growing at a rate of 7 percent per annum. The housing sector alone accounts for 58 per cent of workers in the construction sector. However, nearly 55 percent of these workers are in the unskilled category. In India, residential housing accounts for almost 80 percent of the real estate market in terms of volumes and has been growing at 30 to 35 percent annually (CRI SIL, 2006). Housing Scenario in India:

The progress made by the construction industry of any country could be considered as the index of development of that country. Further, the number of pucca housed built in any country could be another index. While there has been a progressive rise in stock of housing in India since independence, the speed thereof has not kept pace with the rapid growth of population and urbanization. As a result, the shortage of accommodation is increasing continuously and the situation has become acute in urban areas. Total population and percentage of population in unauthorized construction. Year 1961 1971 1981 1991 Population in million 4,15 5.97 8.23 9.93 Population in authorized accommodation, million % 0.50 1.60 3.25 4.45

2003 12.50 6.25 (approx) Source: Table 500-012 of census India 2001. From the above table the following picture emerges: While the total number of households (housing shelter) have increased by about 30 percent, between 1961 to 2003, the total shortage continues to be the same at about 20% of the total households. The increase in shortage of housing in urban areas has been 50 percent as against 25 percent in rural areas. Shortage of Housing: Official and updated statistics on the shortage of housing units in the entire country is not readily available. According to the National Buildings organization (NBO), the components of housing shortage include a) the excess of households over houses,; including homeless households, b) congestion i.e. the number of married couples requiring a separate room, c) replacement or up gradation of unserviceable houses and

d) obsolescence/replacement of old houses. As per the census 2001, housing completions is around 5 houses units per 1,000 population per annum in India. The average annual housing completion in urban areas per 1,000 population was steady at around 7 housing units during the past three decades. This however, is lower than the minimum threshold as recommended by the United Nations of 8 to 10 housing units per 1000 population for developing countries (NHB Trend and Progress Report, 2004). Addition of Census Houses Per 1000 population 1971-81 Urban Added Census Houses (million) Added Households (million) Annual Housing Completions/1,000 population Rural Added Census Houses (million) Added Households (million) Annual Housing Completions/1,000 population Total Added Census Houses (million) Added Households (million) Annual Housing 3.87 5.39 5.26 25.50 30.80 38.56 3.66 26.53 45.58 54.08 15.50 4.62 4.65 19.16 25.61 19.25 29.02 34.56 7.23 7.61 6.83 10.00 11.64 12.95 11.55 16.55 19.53 198191 199101

Completions/1,000 population Source: Census 2001, NHB Trend and Progress Report, 2004. In terms of distribution of households according to rooms occupied, as per Census 2001, 39% of households lived in one room, 30% in 2 rooms, 14% in 3 rooms and 17% in more than 3 rooms. While the median number of rooms is 2, over the last four decades, the number of households living in 1 room has declined, both in rural and urban areas. Housing conditions in India: Housing conditions are a key indicator of socio-economic development. The National Sample Survey Organisation (NSSO) uses the classes, katcha, semi-pucca and pucca to differentiate between the types of homes in India. a katcha house is built with non-durable materials like unburnt bricks, mud, thatches, leaves and bamboo. A pucca house is one built with permanent materials like oven burnt bricks, concrete, stone blocks, cement, iron or other metal sheets and timber. A semi-pucca house is built both katcha and pucca materials. Percentage Distribution of Households with Dwelling units by Type of Sturcture (Fi gures in %) Area type Rural Urban (including slums and squatter areas) Source: NSSO, 2004. Statistics show that exclusive amenities available in homes are also improving. There, however, still exists a wide disparity between amenities available in rural and urban areas as well as amenities available to various income groups. 77 20 3 Pucca 36 Semi-pucca 43 Katcha 21

Distribution of housing by Exclusive Amenities (fig ures in %) Amenities Urban (%) Safe drinking water Toilet facilities Electricity connections Rural (%) Safe drinking water Toilet facilities Electricity connections All-India (%) Safe drinking water Toilet facilities Electricity 37.90 -25.70 62.70 23.50 43.00 83.30 36.40 55.80 26.30 -14.30 55.90 8.80 31.10 80.50 21.90 43.50 1981 74.10 57.40 61.60 1991 81.60 63.60 75.90 2001 90.60 73.70 87.60

connections Source: NHB Trend and Progress Report, 2004, Census 2001. Households savings: Since 2001, the household sector has shown a preference for saving in the form of physical assets relative to financial assets. This could partly be attributed to the soft or lower interest rate regime in the recent period (RBI, 2005). While physical assets include livestock, jewellary and farm implements amongst others, housing accounts for the majority of physical assets. Most people investing in a house are first time home buyers and genuine users of the home. Further, the predominance of physical assets over financial assets is also due to the fact that availability of housing finance has improved in the recent period and therefore made housing more affordable. Household Savings as a percent to GDP

(figures in %)
200 1 200 2 200 3 200 4 200 5

Household 21.2 22.0 23.0 10.3 12.7 23.5 11.5 12.0 22.0 10.3 11.7

Savings Financial 10.2 10.8 Physical 11.0 11.2 Source: Economic Survey 2005-06 Nature and Scope of the Housing Problem:

The Indian economy is undergoing a paradigm shift as it undergoes a transition from a rural to an urban society. With a average gross domestic product (GDP) growth of over 7 percent over the last five years, the driver of growth is predominantly stemming from the services sector which now accounts for over 50 percent of GDP. Changing demographics, a rising urban population, higher disposable incomes and fiscal incentives are encouraging more people to buy homes. However, the archaic legal framework and lack of mortgage penetration, especially at the lower income strata, continue to be challenges in alleviating the housing problem in India. Based on the 2001 Census, for a total population of 1.03 billion, the number of Census houses stood at 249 million, of which 177 million (71 percent) were in rural areas, while 72 million (29 percent) were in urban areas. In 2002, the average number of household members was 5.15 in rural areas and 4.47 in urban areas (NSSO, 2004). In line with international trends as well as with the decline of the joint family system and the rise of the nuclear family, it is expected that the average household size will continue to decline. This, coupled with the fact that more individuals continue to migrate to cities in search of better livelihoods implies that there will be additional pressure on availability of affordable housing. Some of the key challenges and issues preventing the increase in affordable housing stock are enumerated below: Rapid Urbanization: Housing needs are strongly influenced by growth in population and demographic changes. While in the recent period the total population growth has been slowing down, the urban population continues to grow rapidly. The urban population has increased from 20 percent in 1971 to

almost to 34 percent currently (SSKI, 2006). Urbanization is particularly concentrated in urban agglomerations or mega cities, defined as cities having a population in excess of one million people. These mega cities account for almost 40 percent of the total urban population. As per the 2001 census, there were 35 mega cities and the polarization of growth towards them poses a greater challenge in providing housing in these areas as the housing stock is unable to keep pace with demand (Nallathiga, 2005). This is exacerbated by the continuing trend of in-migration to urban areas. As a result, there has been a disproportionate rise in slums. For instance in Mumbai, almost 60 percent of the total population live in slums. Restrictive Laws: One of the major issues constricting the addition of homes is the series of archaic laws governing the Indian housing and real estate sector. Of the over 100 laws governing various aspects of real estate, many date back to the 19th century. Significant ones are the Indian Contracts Act, 1872, the Transfer of Property Act, 1882 and the Registration Act, 1908. Despite the plethora of laws, the legal framework requires a complete overhaul to make it more relevant to todays requirements. These laws often lead to prolonged litigation and create artificial scarcity of land, thereby raising prices. In India, land is a state subject. Thus, while the centre may make amendments and issue guidelines, the responsibility for implementing it remains optional for a state government. With 28 states and 7 union territories (areas directly managed by the central government), support for reforms has varied considerably from state to state. High Transaction Costs: Another issue that constricts the addition of official housing stock is the high transaction costs that go with getting a home registered. At present, every home needs to pay stamp duty at the time of registration. Stamp duty rates vary wildly between stats though, with some states capping the total amount of duty that can be paid, and others with duties as high as 15 percent of the value of the property. In contrast, most of the developed world mandates a stamp duty at a rate in between 1-2 percent. In some cases, high stamp duty leads to massive understatements on the proceeds of a sale.

Thus, there are a large number of homes in the grey market, which prevents the formation of a genuine property market. While the National Housing and Habitat policies have called for rationalization of stamp duties across all states, this has not happened so far. For the states, collection from stamp duty is the second largest revenue earner after excise duties. This explains their reluctance in reduction of these rates. Lowering stamp duty, however, will ensure better compliance plugging present loopholes. Currently, if there is no registration, a transfer is not deemed to have taken place and capital gains tax can be avoided. This results in losses to the exchequer on various counts: understatement of sale proceeds, non-registration, non-payment of stamp duty and capital gains tax evasion. Further, a number of sale transactions are done through the power of attorney route providing an opportunity to evade transaction costs pertaining to stamp duty, registration and property taxes. Lack of Clear Land Titles: Establishing home ownership in India is difficult due to the lack of clear land titles. In India, the state does not certify a title to housing or land property and ownership is established only by a sequence of earlier transfers (Planning Commission, 2002). Such tenuous titles to land have led to nontransparency in property transactions as well as widespread disputes and legislations. In effect, the real estate market sees a distortion in its formation. The tenth five year working group recommended computerization of land records by the year 2005, but this has not been implemented in many states. Fragmented Market: The Indian housing market is highly fragmented with the unorganized sector accounting for over 70 percent of the housing units constructed. The unorganized sector of the housing market is characterized by local small builders and contractors. The organized sector accounting for the balance 30 percent comprises larger developers as well as government and other parastatal entities involved in housing and construction activities. Typically, organized developers tended to be niche players concentrating on a particular geographic location rather than having a pan-India presence. It is

only recently that a few large, corporatised developers have attempted to make their presence felt at an all-India level. Lack of Data: Lack of reliable data continues to be a strong drawback for the housing sector. For instance, in the US, housing starts that measure privately owned housing units started and the number of building permits given is released on a monthly basis. Housing starts is a primary indicator of the health of the economy and this data is known to more markets as it is a good pointer home sales and spending patterns in general. It is also used to plredict the residential investment portion of the gross domestic product. In India, there is no such data available. Neither is there any reliable data on home sales, purchases or movements in property prices. Another problem is that there is no frequently available official data on outstanding mortgages, disbursements or market share of all players in the housing finance market. Banks include loans given to housing finance companies who in turn on-lend to borrowers as part of their housing loans and hence results in an element of double counting. Further, banks only required to disclose their total retail portfolio as part of segmental reporting and are not mandated to disclose the composition of the retail portfolio. Most analysis is thus based on estimates. Low Mortgage Penetration: Despite the frenetic pace of growth in housing finance over the past 5 years in India, mortgage penetration as a percentage of GDP continues to remain low, at 4 percent. This is extremely low compared to countries such as US and UK at over 60 percent of GDP. Indias, performance, even when compared to its Asian peers shows low penetration. On the flip side, this means that there are considerable growth opportunities in housing finance. This is further corroborated by the fact that despite the impressive rate of growth in the housing finance sector in the recent period, financing through the organized sector continues to account for only 25 percent of the total housing investment in India (ICRA, 2003). A Cross- Country Comparison of Mortgage to GDP Ratios Country Mortgage to GDP Ratio (%)

India China Korea Malaysia Hong Kong Germany USA 4 11 14 22 50 52 64

UK 72 Source: European Mortgage Federation, HDFC, 2006 Housing Finance in India: Robust growth in the housing finance market The housing finance market has recorded Robust growth in the last five years, clocking a CAGR of about 40% between FY 1999 and FY 2004. Residential mortgage debt as a % of GDP was a mere 0.58% in 1994 which has moved up to 2.21% in FY 04. Falling interest rates in housing loans 17% (1996) to 7.5% (2004) combined with increasing loan tenures, increasing loan to value ratio and rise in the installment to income ratio are precipitating high growth rates in the housing finance market. Prospects and Recommendations a Future Outlook: Future Outlook Though Indian housing finance system has got its own share of problems, given the huge tapped housing loan market, government support and favourable macroeconomic environment, reasonably resilient banking system, industry has got excellent growth prospects. The present growth rate at about 40%+, appears to be a sustainable the foreseeable future. The tenth plan has estimated the urban housing shortage at the level of 8.9 million dwelling units. The tital investment required for the above is estimated at the level of Rs. 4,15,000 crore. And such a huge amount cannot raised by the Central and State Governments alone. Rather active private sector participation is very much essential for achieving this goal, at least partly. Recommendations and Insights: Greater Uniformity of Standards

Thus, there is a need for following measures to help the market perform more efficiently: Adoption of uniform practice by the housing finance industry relating to matters like appraisal and documentation, prepayment of housing loans, conversion of fixed rate loans into floating rate loans etc. Greater transparency in dealings with the borrowers to enable them to exercise informed choices about products and lending institutions. Promotion of Securitization: In the budget 2002-03, the FM announced that NHB would launch a mortgage credit guarantee company will work to achieve the following goals: Generate a greater volume of mortgage lending in the Indian market Lower down payment requirements to as low as 5% Broader the eligibility for mortgages, and Extend mortgage repayment periods up to 25 years.

These changes will facilitate capital market development by promoting securitization and increasing home ownership. Further, measures to promote residential mortgage backed securitization market in India can further strengthen our housing finance system and make it more competitive. Central registry for housing mortgages: In order to address the issue of rising incidence of frauds in housing finance, section 20 of the SARFAESI Act introduced the provision of setting up a central registry to provide a statutory backing to the security interest in favour of banks and financial institutions and enabling them to claim priority over other claimants while enforcing the securities. ALM: Techniques and schemes should be put in place for a proper asset liability management and explain the generation followed ALM techniques to counter an issue that could threaten the very existence of an institution. Autonomy to Banks: We propose to the banks through RBI, to undertake lending for housing purposes as it will provide a remunerative avenue. The RBI has permitted banks to grant loans for housing schemes up to certain limits from their own resources. Introduced stipulations regarding maximum loan amount and

margins, charging of penal interest, security, term of the loan, graduated installments. Interest rates not too much of a concern: Both the banks and HFCs are increasing their business at the stake of decreasing returns. However, a consoling factor is that mortgages are just 2% of GDP and about 10% of the advances of the banking sector. Hence even the bubble were to burst, it may be withstood by the country.

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*. India: Studies and Technical Advisories in Housing Finance Urban Institute *. NHB report on trend and progress of housing in India, June 2004