The 'affordable' Rs. 30 Lakh Homes will soon become unaffordable.

The 'affordable' Rs 3 million houses will soon become unaffordable. 

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I bought my first house in 2005 for Rs 3 million. The house was located within an hour's commute from my workplace (quite reasonable by Mumbai standards). I shelled out an equated monthly installment (EMI) to the bank that was less than 60% of my net salary. And I was confident to repay the entire loan well before the 15-year tenure. The house was affordable. 

What is considered affordable housing has changed dramatically since then. House prices in Mumbai have multiplied three to five times in the last ten years. And if you are a house buyer in the metro suburbs today, you need to add several more hours of travel time to your workplace. Your equated monthly installment is unlikely to leave you much disposable income. And your home loan burden might stay with you for the better part of your working life. 

With all this in mind, the RBI's recent order to banks comes as a surprise. The central bank has directed banks to lend Rs 90 for every house costing Rs 100. The condition being that the house should be in the 'affordable category' costing Rs 3 million or less. That's a loan-to-value (LTV) ratio of 90%. An LTV ratio below 70% is considered low risk for the bank. 

The RBI's objective to make houses affordable to everyone is noble. Keeping the political agenda aside, a shelter for every Indian is a must for a growing economy. But I am not entirely convinced of two aspects of this new policy. 

The first is if a house costing Rs 3 million or less can be defined as affordable. 

The second is if allowing banks to lend up to 90% of the purchase price of the house will make it affordable. 

Forget Mumbai, there are hardly any metro cities in India today where Rs 3 million will get you a house in a choice location. Except tiny houses in far flung suburbs, this budget cannot accommodate any reasonable needs. 

If the Rs 3 million affordability threshold is for people in smaller towns and cities, then we have a problem of a different sort. The average income levels in such cities are substantially lower than the metros. Hence, it is quite likely that even the Rs 2.7 million loan (90% of 3 million) will be beyond the average loan servicing capacity. 

So we will have a situation where more urban Indians will buy houses in places they cannot live. In other words, they will bespeculate that the house prices will go up enough to afford them a better residential location some day. 

Or people who cannot afford to purchase houses will go ahead and buy one because 90% of the loan is the bank's problem!

There is yet another angle to the affordable homes problem. Truly homeless Indians will still find home ownership beyond their means. But existing homeowners of one or more houses will find it easier to invest and speculate on the affordable homes. Since the banks will be funding 90% of their speculative bet, they have little to worry about. And God forbid, if their speculation holds well, the 'affordable' Rs 3 million houses will soon become unaffordable. 

Involving banks in social causes is one of the worst economic ideas. Like a bad investment idea, it may work in the short term, but it almost always ends in disaster. If the government truly wants every Indian to own a house, they should focus more on education and employment. Encouraging speculative, debt-fuelled home buying in India will not make houses more affordable. 

Do you think getting banks to lend up to 90% of the value will make houses costing Rs 3 million more affordable?

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