Growing Bangalore - Challenges to identity and neighbourhoods

Fixing the Affordable Urban Housing Conundrum - By Ramesh Ramanathan

India has an abysmal story to tell on affordable urban housing. NSSO’s 2002 Survey is revealing: 52,000 slums hold 8 million urban households, representing 14% of the total urban population, and only half the poor – the others live on the streets. Infrastructure facilities are atrocious: only 15% of these households have drinking water, electricity and latrines in their premises. Less than 25% of them have sanitation systems. The housing stock shortage in India is already around 20 million, of which 50% is urban. These figures get worse – Housing and Urban Poverty Alleviation Ministry data show that the urban housing requirement by 2012 will be over 25 million units, 97% for the poor. To provide some perspective, HDFC has financed a total of 2.5 million homes over 25 years. If we didn’t already know this, the writing is clear: the need of the moment is scale.

Intelligent minds are attempting to grapple with this complex problem, both within and outside government. One question worth asking is, “What role can be played by market forces in solving this problem?”
After all, the boom in India’s housing finance has happened due to market forces. So it is logical to ask why banks are not lending to the low-income group, and why real estate developers are not building for this gigantic market. The NSSO survey shows that the urban poor spend close to Rs 1 lakh of their own money on housing: the nesting instinct is universal.

Housing finance companies and large banks don’t service the low-income market for three reasons:
1. The inability to assess credit risk: no pay slips, no tax returns, uncertain cash flows
2. Lower profit margins due to smaller transaction sizes and fixed costs
3. Lack of clarity on recoveries, especially given uncertainty over land ownership

While there have been small pilots based on market-driven solutions – a few hundred units in one city or another - large-scale answers need policy support, and will emerge only over a period of time.

One example of the kind of policy support is related to the structural constraint of land title. The absence of a guaranteed land title system in India has far-reaching implications. Current land ownership records only provide “presumptive title”: the sale deed and the tax-paid receipt. All developed countries have a system of guaranteed title, and most developing countries don’t. Herando de Soto, a Peruvian economist has written compellingly about this in a book titled, “The mystery of capital”. While many countries are changing their ways, leadership in cleaning up the land title process is barely beginning in India.

But land-title systems alone are not enough. We need the creation of zoning and land-use planning that specifically encourage low-income housing, and mixed-income neighbourhoods. We also need integrated delivery of services – water supply and sanitation, healthcare, education and access to livelihood - and not just housing in isolation. Examples show that for every rupee invested in such public infrastructure, the poor generate seven rupees of their own capital. But not everyone can afford to have their own home. So, we also need stocks of publicly-created, innovatively-managed rental housing as part of low-income housing policy.

Beyond these enabling structural issues, we also need development finance assistance to jumpstart market-based solutions for affordable housing. Here, we have a mixed track record. On one hand, over the past fifty years, government policy has matured from a fragmented scheme-oriented approach to one that sees housing as part of integrated development. But actual scalable solutions are yet to really kick in. HUDCO, which was established in 1970 has lent a cumulative amount of Rs 10,000 crores for urban housing. However, HUDCO’s structure of being a quasi-financial institution with minimal regulatory oversight or governance mechanism demands several institutional changes in its own functioning before it can do much for the sector. The National Housing Policy and the National Housing Bank emerged out of continued thinking on this issue. While successes were hard to come by in the early days, NHB has begun to take a decisive leadership role with the various actors involved in this space.

Doing justice to their role in filling the housing gap will require NHB to engage in a multi-pronged strategy. Only a small portion of this will have to do with addressing market linkages wherever possible, while much of the early work will have to deal with the structural issues mentioned above. The challenge is that the policy levers are distributed in various entities that are scattered across our federal system: land title is a state subject, but there are disabling central laws; urban planning is a local government subject, but there is heavy state involvement. A strong partnership needs to emerge with the Ministry of Housing and Urban Poverty Alleviation.

Fulfilling this large mandate will demand much intellectual and financial capital. Even as the days of development finance institutions come to a close in India, we clearly need at least one more chapter to be written.