By Janaki Kibe, AHI South Asia Associate
I attended The Indian School of Business Affordable Housing Conclave 2012 in Hyderabad a few weeks ago. Over the course of an intense, yet inspiring, day a group of developers, planners, architects, policymakers and academics discussed a range of topics including private-sector driven business models for affordable housing, public policy imperatives for facilitating affordable housing, and the role of finance in affordable housing. While this group of motivated players identified common challenges to developing affordable housing at scale—government bureaucracy, corruption, land prices—there seemed to be some disagreement about the ways to resolve these challenges. Some argued that the government should simply step away from the housing sector – let purely market-driven forces pave the way ahead. While I do agree that the Indian government tends to be more of a hindrance than a facilitator in low-income housing development, I think there is something to be said of their expansive network. If only there was a way to transform the government from the inefficient monstrosity that it is today and run it like a lean, private company leveraging their connectivity and reach into different parts of the country.
The need for affordable housing in India is unarguably acute. Current estimates predict a housing shortage of 25 million housing units. (Note: this is likely an outdated and conservative estimate.) Assuming an average price of construction cost of $10,000/unit, affordable housing in India represents a US$250 billion market opportunity. This potential market opportunity has recently driven (more adventurous) developers and financiers to enter the low-income housing market in India. While some headway has been made in the construction and financing of low-income housing, serious challenges remain to increasing the scale of affordable housing construction and finance in India. And scale is the necessary element for combating such a severe housing shortage.
On the supply side, lengthy government permitting processes often hurt low-income housing developers. Drawn-out timelines reduce developer returns, and contribute to the sector’s relative unattractiveness to suppliers. Low-income housing developers use 12-15 months as the optimal product delivery time because of the difficulties of getting longer financing, much faster than traditional higher income housing developers. The quicker delivery time means that low-income developers are more significantly affected by permitting and construction delays. Additionally, permitting rules and processes vary significantly across India, making it difficult for developers to operate at a large, pan-India scale.
Role of the public sector: To enable growth at scale, the government must reform its own processes—especially permitting. One attendee, Jaya Kumar, the Managing Director and Chief Operating Officer of the low-income housing construction group Value and Budget Housing Corporation http://www.vbhc.com/, encouraged public opinion to drive reform in the permitting process. He stressed the idea of streamlining and computerizing the permitting process. Computerization would ideally also help increase transparency and reduce corruption in the Indian housing sector. Regardless of the exact methodology, it is clear that the government’s role should be as a facilitator, rather than as an impediment, to affordable housing.
For housing finance companies (HFCs), the challenge remains in developing reliable, scalable credit assessment models. Currently, many low-income HFCs use field-based credit assessment models to gauge customer repayment capacity. While these have been successful at assessing risk at a smaller scale they are laborious and costly, which leaves some question regarding their ability to be scaled-up. Perhaps there is room to borrow some of the institutional capacity of microfinance institutions (especially those that have been able to reach a wide audience) in assessing borrower repayment capacity for this market and reducing home loan default rates.
An alternative approach suggested by Professor Richard Green of University of South California’s Sol Price School and Public Policy and the Marshall School of Business stressed that clearer titles and greater down-payment requirements could help reduce default rates. If people have equity to protect, they won’t default! Sounds a bit like the old push for “skin in the game.”
While I think that these tools are effective in the US—where titles are generally quite clear and low downpayments have contributed to high default rates—I am not confident that these are the right tools for the Indian context. In India, there is a tenure spectrum, and getting to the root of land titling disputes is akin to engaging in a horrific divorce battle that is likely to take 30+ years. Additionally, the aspiration to own a home in India is so strong that people do feel that they have “skin in the game” even if they have not paid large down payments. From my field experiences, people default on home loans not because they don’t have “skin in the game” but because of weak income situations.
More than land titles and down-payment requirements, I think we need to design better credit assessment models. Centralized databases where borrower credit history (including loans from moneylenders) can help reduce some of the information asymmetry that plagues the current low-income market in India.
At the end of the day, questions remain: how do we scale up small successes to address a 25 million housing unit shortage? How do we leverage private and public sector capacities to benefit low-income groups? How do we regulate an industry whose customer base is highly informal?