India's affordable housing market set to reach INR 67 Tn; demand expected to be 31.2 mn units by 2030: Knight Frank India and CII report
- Funding opportunity pegged at INR 44.6 Tn
New Delhi, December 4, 2024: Knight Frank, India's leading real estate consultancy, in its latest report 'Affordable Housing in India: Demand-Supply Assessment and Financing Opportunity' launched during the CII Conference on Indian Housing Landscape – Affordable to Accessible observes that the existing shortage plus upcoming demand for affordable housing segment in India is estimated to be 30.7 mn units by 2030. The opportunity to finance 30.7 mn units is calculated to be INR 44 tn.
| Opportunity to finance demand surge of affordable housing segment by 2030 |
As per Knight Frank analysis, led by factors such as urbanisation and employment opportunities, 22.2 mn units of housing will be required in urban centres in India. 95.2% of this demand, which is equivalent to 21.1 mn units, will be concentrated in the affordable housing segment. A predominant share of 45.8% of the demand will be concentrated amongst the EWS households. There is already an existing shortage of 10.1mn units. According to the analysis by Knight Frank India, the cumulative affordable housing demand in India is projected to reach 31.2 mn by 2030, with the market size estimated at INR 67 tn.
The current portfolio of the affordable housing loan market in India is estimated to be INR 13 tn, with Housing Finance Companies (HFCs) constituting INR 6.9 tn and Scheduled Commercial Banks (SCBs) holding a share of INR 6.2 tn. The loan market in this category is anticipated to experience significant expansion due to the escalating potential demand for affordable housing. The reliance on loans is notably high in the affordable housing segment as compared to premium in India. Based on an assumption of a 77% loan dependency and Loan-to-Value (LTV) ratios applied at various loan thresholds, the potential financing opportunity for banks and Housing Finance Companies (HFCs) in the affordable housing segment is estimated to be INR 45tn.
Assessment on financing opportunity for banks and HFCs for affordable housing consumer loans
| Total housing shortage | Housing shortage (Ex HIG) | Area | Cost of dwelling | Average cost | Market size | Financing Opportunity | |
| Units in mn | Units in mn | Sq ft | Rs mn | Rs mn | Rs tn | Rs tn ** | |
| EWS | 15.0 | 15.0 | 150-300 | <1.5 | 1.2 | 17.4 | 11.8 |
| LIG | 10.9 | 10.9 | 300-600 | 1.5-3.0 | 2.3 | 25.2 | 17.2 |
| MIG | 5.3 | 5.3 | 600-1200 | 3.0-5.5 | 4.6 | 24.6 | 14.9 |
| HIG | 1.1 |
| |||||
| Total | 32.3 | 31.2 | 67.0 | 44.6 |
Source: Knight Frank Research Estimates, Note: Assumption 1. *77% loan dependency of as per Knight Frank Survey, and **90% & 80% LTVs
| Capital inflow into affordable housing in India between 2011-24 |
Between 2011 and September 2024, the affordable housing segment attracted capital inflows of USD 1.6 billion. This represents just 9.8% of the total capital directed towards the residential sector and a mere 3.6% of the overall real estate sector inflows. The limited inflow of foreign funds has been a key factor, with foreign investments accounting for only 15% of the total private equity inflows into affordable housing.
| Existing demand side challenges and required policy measures |
Mismatch in categorisation of affordable housing
The Ministry of Housing and Urban Poverty Alleviation (MoHUA) refers to affordable housing as residential units that are reasonably priced for individuals with incomes below the average household income. MoHUA targets economically weaker sections (EWS), low-income groups (LIG) and middle-income groups (MIG). The beneficiary criteria are set as follows:
| Segment | Annual household income | Carpet area (sq m) |
| Economically Weaker Section (EWS) | Up to 0.3 mn | 30 |
| Low Income Group (LIG) | INR 0.3 to 0.6 mn | 60 |
| Mid Income Group I (MIG 1) | INR 0.6 to 0.9 mn | 160 |
Source: MoHUA, Knight Frank Research
Priority sector housing loan categorisation by the RBI
|
| Cost of the property (INR mn) | Loan limit (INR mn) |
| Metro | < 4.5 | < 3.5 |
| Non-metro | < 3.0 | < 2.5 |
Source: RBI, Knight Frank Research
These definitions serve as a foundation for determining which households qualify for various government benefits under PMAY-U. However, a disconnect persists between policymakers' definition of affordable housing and the realities of the current residential market. The average cost of units in the affordable housing segment has risen considerably compared to the pre-pandemic levels of 2019, affecting affordability for homebuyers, particularly those in the EWS category.
In Mumbai city, the average launch price of an affordable housing residential unit has increased from an INR 4.8 mn to INR 7.3 mn in 2024. This indicates the price of the affordable housing units beyond the threshold set by the RBI under priority sector housing.
Similarly, at an overall scale, there has been a disproportionate price rise with smaller housing units witnessing a significant surge vis-Ã -vis larger units. For instance, in the MMR region, the average price of a residential unit with an area under 30 sq m increased by 55% between 2019 and 2024 (until Sep), whereas the average launch price of a residential unit with an area of 60-160 sq m has increased by 29% between 2019-2024. Therefore, the affordability of a EWS household has been significantly depleted.
As per Knight Frank estimates, the home loan EMI/Income ratio of a household with an annual income of INR 3 lakh per annum has increased from 43% in 2020 to 62% in 2024, indicating a 19 percentage points increase. This escalation is a consequence of the combined impact of interest rate hikes and price rise. Notably, this ratio exceeds the Fixed Obligation of Income Ratio (FOIR) limit of 50% established by the banking sector in India, thereby constricting the scope of home loan borrowings for the EWS homebuyers. Besides, this segment finds it challenging to arrange for the increased down payment requirement. This, therefore, calls for a policy revision aligned with the residential markets.
In contrast, the EMI/income ratio of a household above the MIG category with an annual income of INR 1.2 mn, has increased by 13 percentage points, rising from 28% to 41%. And the affordability as well continues to remain within the FOIR limit established by the banking sector, providing easy access to financing for home purchases.
An EWS household with an annual income of under INR 3 lakhs would find it challenging to avail this loan as the EMI requirement is above the FOIR limit set by the banks.
House prices in Mumbai Metropolitan Region (MMR)
| Size of the unit (sq mt) Average unit price (INR mn) | <30 | <60 | <160 |
| 2019 | 1.7 | 2.2 | 2.7 |
| 2020 | 1.9 | 2.2 | 2.6 |
| 2021 | 1.9 | 2.4 | 2.7 |
| 2022 | 2.8 | 3.4 | 3.4 |
| 2023 | 2.8 | 3.4 | 3.5 |
| 2024 | 2.6 | 3.3 | 3.4 |
| % change in prices growth since 2019 | 55.4% | 48.3% | 29.2% |
| CAGR (2019-2024) | 7.6% | 6.8% | 4.4% |
Source: Knight Frank Research
| Estimating home loan and EMI requirement (Case study: MMR) |
Income Gap assessment
| Household Income Requirement Calculation | |||
|
| EWS | LIG | MIG |
| Average Unit Price (INR lakhs) | 26.4 | 33.1 | 34.3 |
| Loan Amount (INR lakhs) | 23.8 | 26.5 | 27.5 |
| Tenure (in months) | 180 | 180 | 180 |
| Lending rate (In %, per month) | 0.007 | 0.007 | 0.007 |
| EMI (In INR) | 24,064 | 26,808 | 27,772 |
| Monthly Income (In INR) | 48,127 | 53,616 | 55,545 |
| Annual Income Required (In INR lakhs) | 5.8 | 6.4 | 6.7 |
| Existing Income Limit (INR lakhs) | 3.0 | 6.0 | 9.0 |
| Gap Estimate (INR lakhs) | 2.8 | 0.4 | - |
Source: Knight Frank Research
To enhance the accessibility of affordable housing schemes, particularly for EWS households, it is essential to revise the income eligibility criteria. Currently, the EWS category is capped at an annual income of INR 0.3 million, whereas the income needed to purchase a 30 sq. mt. home in tier-1 cities is estimated at INR 0.6 mn. Such revisions should be tailored to specific geographies, accounting for their cost of living.
Additionally, the RBI's definition of affordable housing, linked to priority sector lending, requires an update. At present, home loans qualify as priority sector lending if the unit price is under INR 4.5 million in metro cities and INR 3.5 million in non-metro cities. However, since the RBI's last revision in 2019, housing prices have increased significantly. Adjusted for consumer price inflation (CPI), the average house price in metro cities has risen from INR 4.5 million in 2019 to INR 5.7 million in 2024, while in non-metro cities, it has grown from INR 3.5 million to INR 4.4 million during the same period.
Supply Side Policy Requisites
The growing demand for affordable housing will generate the need for active developer participation. However, in the last few years, the private developers' participation in affordable housing projects have moderated due to lower profitability of the projects due to increase in land costs, construction costs, lack of institutional investments etc. Hence, there is a need for active policy measures to attract private developers' participation into affordable housing such as;
a. Unlocking vacant PSU lands: Provision of vacant/unused PSU lands can benefit the developers as it will significantly reduce their construction cost, which in turn will reduce the selling price of the housing units. As per Knight Frank estimates, the land requirement of construction of 31.2 mn housing units is 1.9 lakh acres.
b. Extending free FSI: The FSI/FAR limits in Indian cities are very restrictive when compared globally. As the population pressure on cities in India continues to increase, limited FAR/FSI leads to an increase in prices. This restricts the home purchasing capacity of households especially in the lower income groups. It also increases the financial cost of an affordable housing project making it unviable for the developer as it impacts their profitability. Increasing the free/base FSI for the affordable housing development can potentially reduce the overall cost of the dwelling and make it financially conducive for the developer to infuse supply while benefiting the consumer.
As per Knight Frank assessment, increasing the base or the free FSI by 50% would raise the supply by 50% and reduce the overall cost of construction of a dwelling by 24%.
c. Provision of tax incentives: Currently, the tax incentives are limited to total income tax waiver on the profits of the developer for one year. However, since the profitability of the affordable housing projects itself is challenging, it has limited impact on the developer participation. Hence, there is a need to provide tax incentives such as rebates on GST, subsidies etc for the private developers to improve the financial feasibility of the project.
In addition to the above measure, development of new satellite cities with adequate physical and social infrastructure can reduce the housing burden from the mega cities. Some of the new satellite cities that are identified include – Panvel and Vasai Virar (Mumbai), Manesar, Sohna, Meerut (Delhi NCR), Hoskote, Nelamangala, Devanahalli (Bengaluru) etc. Some of these cities are already in the nascent stage of development. Hence, it is essential that, from early stages of development, the land use planning or the zoning regulations of the new cities are made to focus on affordable housing.
Focus on Industrial Workers Housing
While there is a pressing need to cater to housing challenges in the affordable housing segment in India, there is an opportunity developing for industrial workers housing as well. Due to policy push such as PLI schemes, make in India etc, the manufacturing output in India is estimated to grow from USD 491 bn in 2023 to USD 975 bn in 2024. This will potentially generate massive employment opportunities. As the sector is poised to expand, the employee requirement by 2030 in the manufacturing sector is estimated to be 92.5 mn. Increase in employment base especially through contractualization, will generate the need for housing, most preferably for the rental housing. As per Knight Frank estimates, even assuming a current contractualization rate of 40%, the number of contractual employees by 2030 is estimated to be 37 mn.
Innovative Finance Mechanisms for Affordable Housing
The growing demand for affordable housing projects in India is bound to generate immense financing and funding opportunities. While the financing demand of the consumer is already estimated in the above sections, there will also be a requirement for the developer or construction finance as adequate financing structure and funding are critical to address the affordable housing shortage and infuse supply. In addition to support from banks and NBFC, some of the innovative finance mechanisms that can be adopted include – impact investment, blended finance, housing trust finance etc. Such techniques are already being used in developed economies, adoption of the same in India will support the developer financing required for affordable housing projects in India.
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