Affordable housing may be defined as economic potential of individuals to buy a cemented house with inbuilt kitchen, toilet etc., along with supply of electricity and drinking water. Considering the parameters of affordable housing, that price of housing units should be less than four times to annual income of Economically Weaker Section (EWS) and Low Income Group (LIG) people, and monthly housing expenses including monthly installment towards housing finance should be less than 30% of customer’s monthly income, we find that housing is yet not affordable for 95% urban household in India. Lack of low cost land in urban areas tend to increase the housing prices beyond 4 times to annual income of EWS and LIG customers; and even under subsidized housing loans the Equal Month Installments (EMIs) amounts is found more than 30% of EWS category customer’s monthly incomes.
Attempts to make housing affordable by reducing the size of housing unit from 60 to 30 sq. meters for EWS category is also not working because customers experience congestions, besides poor resale value of such houses. So there is little demand for such houses and often many customers tend to refuse acquiring such houses. It was noted recently that the Delhi Development Authority (DDA) has received 5,661 requests for surrender or cancellation of flats allotted to the applicants under their “Housing Scheme – 2017”. Also be noted that, out of the total 12,000 unoccupied flats, 10,000 belongs to 2014’s scheme, while 2,000 are of 2017’s scheme. The Government should better try inducing the customers and builders by increasing the size limit of housing units from 30 to 45 sq. meters for EWS customer.
Considering the fact that 73% urban households are of Economically Weaker Section (EWS) and 22% belong to Low Income Group (LIG), Indian Government should try reducing the cost of housing units by providing low cost lands for development of housing projects instead of calling it affordable by halving the size of housing units for EWS people. The Credit Link Subsidy Scheme (CLSS) is unable to make housing affordable because the subsidy amount offered under CLSS is failed to reduce the EMI amount below 30% of EWS customer’s monthly income. So, despite extended reach of CLSS and low interest rates during 2017, the outstanding housing loans at Scheduled Commercial Banks (SCBs) declined in three months. Any housing loan of Rs. 8.6 lakhs @ 8.35% p.a. for 20 years under PMAY scheme is not be affordable for any EWS customer who monthly earns Rs. 20,000, because the EMIs of Rs. 6,464 amounts to 32.3% of customer’s monthly income. However, by correlating the impact of inflation upon customer’s income and value of housing units, we can find Joint Asset Lease (JAL) as alternative affordable housing finance for India’s 73% EWS urban households.
Under JAL, the financier signs “Joint Asset Purchase Agreement” with the customer before investing in housing units and then leasing out the outstanding unit shares in housing unit to the customer against monthly rents; with provision for the customer to periodically buy back financier’s unit shares in the asset. If customer can invest Rs. 1 lakh in purchase of housing unit worth Rs. 9.6 lakhs, the financier would have to invest Rs. 8.6 lakhs. So at the time of purchase, the financier may hold 89.58% against 10.42% customer’s share in the jointly owned asset. Now to clearly demarcate unit shares in that asset between the financier and the customer, the value of housing unit has to be divided into 9.6 lakh units worth rupee one each. Considering lowest mean of housing inflation in India, price of unit share may keep increasing by 0.33% per month. The customer need to pay rental charges in accordance to financier’s outstanding unit share in the asset along with buying back financier’s outstanding unit shares in the asset at respective price in particular month.
The payable monthly instalment by the customer shall be comprised of rental charges for using financier’s outstanding unit shares in the asset and the price of unit shares buy back by the customer. After buying back all units of the financier in that asset, the customer will becomes the sole owner of the asset and the financier will execute release deed to declare customer as the sole owner of that Asset.
Table 1 – Hypothetical Cash flow under Joint Asset Lease (JAL)
Months Customer’s Monthly Income Asset Value (in Rs. Lakhs) Value of Unit Share (RS.) % of Asset owned by Financier % of Asset owned by Customer Monthly Rent Charges Paid to buy back unit shares Total Amount paid by customer I as % of B
A B C D E F G H I J
0 20,000 9.60 1.0000 89.6% 10.4% -8,60,000
1 20,050 9.63 1.0033 89.3% 10.7% 2,580 2,901 5,490.7 27%
12 20,608 9.99 1.0403 85.9% 14.1% 2,576 2,936 5,629.5 27%
24 21,235 10.39 1.0823 82.2% 17.8% 2,565 2,990 5,800.7 27%
36 21,881 10.81 1.1259 78.5% 21.5% 2,546 3,047 5,977.2 27%
60 23,232 11.70 1.2186 70.7% 29.3% 2,484 3,170 6,346.3 27%
96 25,417 13.17 1.3720 58.4% 41.6% 2,314 3,374 6,943.2 27%
120 26,987 14.26 1.4849 49.8% 50.2% 2,138 3,525 7,372.0 27%
180 31,349 17.37 1.8094 26.4% 73.6% 1,393 3,963 8,563.4 27%
240 36,415 21.17 2.2049 0.0% 100.0% 30 4,484 9,916.7 27%
Source: – Research work under alternative finance by TFS Group, India
We tried to compare Affordable Housing (AH) i.e., monthly installments on housing finance as percentage of monthly income under three different housing finance models Viz a) Simple Mortgage Loan (SML), b) PMAY Loan and c) JAL with a case where any EWS customer with monthly earning of Rs. 20,000 seeks availing housing finance of Rs. 8.6 lakhs for 20 years. We presume that customer’s monthly income would annually increase by 3% (i.e. 0.25% per month). The annual interest rate on SML is assumed as 8.35% and subsidy of Rs. 2,20,187 under CLSS reduces EMI amount under PMAY loans.
Though under JAL the customer may be paying more money in 240 months compared to PMAY loan, it will be still affordable for EWS customer because monthly housing expenses is around 27% of monthly income compared to 37% under simple mortgage and 32.3% in case of loan availed under PMAY in the first month. If subsidy under CLSS to any EWS customers earning Rs. 20,000 per month reduces the EMI amount by 12% (from Rs. 7,382 to Rs. 6,464 on loan of Rs. 8.6 lakhs @ 8.35% for 20 years), JAL can reduces the initial monthly payable installment amount by 26% (from Rs. 7,382 to Rs. 5,491); that too with potential to reduce the fiscal deficit of the Government by eliminating the need of subsidy.
So to boost affordable housing the Government should initiate pilot of JAL as affordable housing finance product for poor people because that would not only help 95% Indians urban households afford housing units, but also help improving launch of new housing projects. Ultimately it will encourage the employment and economic growth in India along with reducing the fiscal deficit for the Government.