Union government’s housing scheme tragets derailed; low-income house buyers face increasingly volatile financial markets
Having a house of their own is a dream for millions in India. The Union government, through its Pradhan Mantri Awas Yojana (PMAY) scheme, has been working since 2015 to provide housing to the urban poor. However, as the country battles the novel coronavirus disease (COVID-19) outbreak, housing targets have been derailed.
It is imperative to note that the loaned dream could turn into a nightmare if proactive steps are not put in place. Here is a quick insight into what COVID-19 has been brewing for the housing sector.
The dichotomous reality of housing
Millions of Indian households are struggling to find an accommodation appropriate to their family size, needs and budget. Ironically, at the same time, about 234,000 unsold budget housing units (priced below Rs 40 lakh) across seven major cities are currently available.
These comprise both under-construction and ready-to-move homes, according to data by ANAROCK property consultants, till March 2020.
This speaks volumes about the inability of the Indian house seeker to afford what is available in the market.
According to Reserve Bank of India’s (RBI) Residential Asset Price Monitoring Survey of 2019, housing affordability had worsened over the last four years as house price-income ratio increased to 61.5 in March 2019 from 56.1 in March 2015.
Mumbai, with a ratio of 74.4, was the least affordable city in India. The worsening of housing affordability was confirmed by another matrix; median loan-income ratio as it moved to 3.4 in March 2019 from 3.0 in March 2015.
The Union government’s policies largely encourage households to take home loans to buy unsold inventory by providing interest subvention under PMAY's ‘Credit-linked Subsidy System’ and by giving income tax exemption on housing loans.
However, the policy has exposed low-income house buyers to volatility of financial markets over the years. The situation is touted to further nosedive, thanks to COVID-19.
COVID-19 activates Murphy’s Law
The central bank futher noted that EMI for home loan makes up for 38.2 per cent of a household income (median value). It goes up to 43 per cent for Mumbai and Ahmedabad.
These statistics are for not disaggregated by income class, but it won’t be wrong to assume that the EMI burden on the low-income household will be higher than the median value. This is highly indicative of which income group would be the first to miss their EMI due to COVID-19 lockdown impact.
The government was well-aware of the fallout, and yet, did come to the rescue of these households. It instructed banks to defer installments and interest/EMIs on term loans falling due between March 1 and May 31, 2020.
In short, households that could no longer afford to pay EMI due to loss of income under current lockdown could defer EMIs for three months without attracting late fee. But the devil lies in the details, and the manner in which banks have operationalised this relief measure is outright diabolical.
SBI clearly noted in its rollout of the relief package that opting for it would cost the house buyer heavily in long run. Its website read:
Impact in case of home loans — for a loan of Rs 30 lakh with a remaining maturity of 15 years, the net additional interest would be approximately Rs 2.34 lakh equal to eight EMIs.
Interestingly, the cap on PMAY ‘Credit-linked Subsidy System’ is Rs 2.67 lakh. Given that almost everyone availing this subsidy would be having at least 15 years of their loan term remaining (scheme was launched in June 2015, and standard loan term is 20 years), most of the subsidy benefit would be washed out by this measure.
Real estate industry and housing finance has been sliding since the September 2019. The crisis of Infrastructure Leasing & Finance Services, a leading infrastructure finance company, dried up liquidity in the sector.
The government took a slew of measures to revive the real estate sector by easing investment curbs to provide last-mile funding to about 1,600 stalled projects at different stages.
It also increased income-tax exemption on housing loans between Rs 2.5 lakh and Rs 3.50 lakh for affordable housing.
Now that COVID-19has thrown a spanner in the recovery process, most experts fear the sector might drive the imminent economic collapse. The small home buyer may face the heaviest blow, as government would probably bail out banks and real estate developers — but not them.
A repeat of the 2008 global recession bailout, where banks failed to transfer relief to the public, would not be a surprise.
There are over 600,000 under-construction budget housing units in seven major cities, most of which have already been sold. Almost every home buyer would have taken up loans with or without availing government subsidy. And all of them are paying rent on their existing accommodation as well.
COVID-19 has delivered a triple blow to this group. Their income has declined. The lockdown would significantally delay delivery of under-construction houses, which will prolong their current rent burden.
The home loan burden will increase with the botched up relief measure on EMI payment. As a result, the crisis won’t just break their house dreams, but their backs as well.
Living on credit
Much of the lower-middle and low-income groups still live and operate outside the formal credit market. Their social capital might still be able to stand the COVID-19 assault on formal housing market.
But one should not take solace in this.
In fact, these informal housings are the hotbed for spread of diseases like COVID-19. People living in these homes and communities can’t practice social distancing as advised by the World Health Organization, leave alone a healthy lifestyle.
We need to build healthy and dignified housing infrastructure in this country, but current system that unfairly burdens the working class is not the way to go about it. Housing is a human right and we need to treat it like one. We ought to find a better way to finance housing for all, and maybe even rethink its nature.
COVID-19 will certainly damage this system beyond repair and we need to use this as an opportunity to fundamentally redefine housing in India.
We perhaps need to bring back rental housing. The housing supply need not be completely ownership-centric. One absolute takeaway from this pandemic is that we should no longer use affordable housing as credit market.
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