The state of housing: What CSE research tells us about rents in Indian cities

Six years after the launch of the world’s biggest housing programme — the Pradhan Mantri Awas Yojana (PMAY) — the picture of housing in India has undergone some transformation. The programme’s goal is to house every Indian in a pucca dwelling by 2022.

As of November 22, 2021, out of the 11.4 million sanctioned dwelling units, 8.9 million (78 per cent) were grounded and 5.2 million (45.6 per cent) have been completed. To make these houses, the Government of India committed a sum of Rs 1,84,808 crore, of which Rs 1,13,431 crore has been released; of this, Rs 1,01,776 crore has been spent.

As the statistics indicate, the country seems to have made significant progress in the direction of meeting its goal; but a lot more remains to be done towards improving the quality of housing or providing access to it to the poor.

The ongoing COVID-19 pandemic has forced open new doors: the PMAY-U (urban) has recognised and internalised a new housing typology — affordable rental housing. This was done to address the problems faced by millions of migrant workers and urban poor who were forced back to their hometowns during the lockdowns, as they ran out of means to sustain themselves in the cities. Shelter was one of these means.

The Government of India has launched the Affordable Rental Housing Complex (ARHC) scheme to improve the quality of living of migrant workers and urban poor by enabling access to affordable shelter close to the workplace. Other crucial parameters that have been kept in mind are access to education, healthcare, water and sanitation and daily needs.

What is affordable housing?

A house in India is considered affordable for an LIG (lower income group) household when the monthly installment or rent does not exceed 30 per cent of the household’s gross monthly income.

This benchmark was established in 2008 by the Task Force on Affordable Housing for All, set up by the Union Ministry of Housing and Urban Affairs to “look into the various aspects of providing affordable housing for all”; it measures affordability using the expenditure method or the housing cost burden method.

Under this, the expenditure towards housing is classified as affordable if it does not go above a certain percentage of the household income. This percentage cut-off is set by the respective governments. Globally, this cut-off is about a third of the household income.

Hundreds of thousands of migrant workers had to walk back to villages several hundreds, even thousands, of kilometres away when the COVID-19 lockdowns left them jobless in major Indian cities as they couldn’t afford rents and sustain families anymore. Photo: Vikas Choudhary

Based on the affordability benchmark, the Technical Group on Urban Housing Shortage (under the Union Ministry of Housing and Urban Poverty Alleviation) has estimated 18.78 million households in need of housing; the PMAY was launched in response to this assessment. While the PMAY was being implemented, independent research published by ICRIER (Indian Council for Research on International Economic Relations) estimated a housing demand of a minimum of 29 million and a maximum of 50 million houses as of 2018.

This puts the validated housing demand of 11.2 million as a gross under-representation of the housing shortage in India. The massive reverse migration during the COVID-19 lockdowns further confirms this; people left cities as they could not pay for their rent.

But the use of the expenditure method by the government for defining housing affordability has several inadequacies. For instance, it overlooks housing price dynamics across a city, and the disposability of income which is very less at the bottom income-strata.

As a result, the growing unaffordability for housing is not addressed by policies and the housing demand-supply gap keeps widening. This calls for indicators that capture housing affordability on-ground with respect to the housing prices prevalent in the city.

Need for better indicators of housing affordability

Price-to-income ratio (PIR) is a median-multiple indicator: It is the ratio of median house prices to the median annual household disposable income in a city. This indicator has emerged as a commonly agreed measure of affordability as it has the ability to give a ground picture of the available housing and people’s ability to afford it.

According to a study conducted by Asian Development Bank in 2018, a PIR less than or equal to three means the house is affordable. A PIR of more than or equal to 5.1 means severe unaffordability. A PIR between 3.1 and 4 means moderately unaffordable; one between 4.1 and 5 means seriously unaffordable. The higher the PIR, the more unaffordable becomes the housing.

The Reserve Bank of India has been conducting a Residential Price Asset Price Monitoring Survey since 2010 across 13 cities. This is on the basis of housing loans disbursed by banks and housing finance companies.

In 2019, this analysis revealed that housing affordability has worsened over the past four years, as the PIR had increased from 56.1 in March 2015 to 61.5 in March 2019. While Mumbai was the least affordable city, Bhubaneswar was the most affordable. However, such analyses have remained disconnected with the policy discourse.

Centre for Science and Environment (CSE), a policy advocacy non-profit based out of Delhi, studied PIR in Delhi to understand the ground reality when it comes to formal affordable housing and housing for the poor.

This study was also done to comprehend what kind of data is existing on our cities for capturing housing affordability; whether that is adequate; and what more could be needed to fully understand housing affordability. The evaluation showed that there is dearth of data on household incomes at city and neighbourhood levels.

Globally, countries have used different data sources to calculate respective PIRs and guide policy. Croatia, Latvia and Serbia look at average apartment size, average price per sq m inside and outside the city, and yearly average net salary of households. In the case of Turkey, it is housing price index data, GDP shares of cities, per capita GDP and total disposable income of the country.

China has used datasets such as bank loan interest rates, annual loan repayment data and down payment ratio. India needs to identify its own datasets and indices that could help in understanding housing affordability in cities.

Affordability of rents

As affordability takes the centrestage in the ARHC scheme, CSE investigated the rents at a few ARHCs. According to the ARHC scheme, the rents are to be fixed by the ULB(urban local body) based on a survey and will increase biennially by 8 per cent, subject to a maximum gross increase of 20 per cent over a period of five years from the date of signing the concession agreement.

A few cities that have floated tenders for retrofitting of vacant government housing projects have disclosed the rents range from Rs 800 to Rs 4,500.

In order to see how feasible these rents are for the poor in the context of a particular city, CSE evaluated the rent-to-value ratio for a few of the ARHC projects. This is the ratio of annual rent divided by the market price of that unit. The higher the ratio, the more exorbitant is the rent with respect to the market value of the dwelling unit.

Neighbourhoods in Mumbai and Delhi-NCR demonstrate a rent-to-value ratio of 2.63. Mumbai and Delhi are the two cities that have reported the majority of vacant housing stock, house a majority of migrant workers, and are known for exorbitant rentals. Taking 2.63 as the benchmark, rent-to-value ratio for most of the cities was found to be ranging from 1.24 to 5.73.

This shows that rents that are meant to be affordable for the poor, may not be so. This needs to be addressed by the ULBs.

Addressing the affordability issue

Better city-level datasets needed for calculating PIR for housing affordability: CSE’s research has revealed that current housing schemes are disconnected with housing affordability of the poor in cities. Existing mechanisms are inadequate as well in assessing housing affordability.

PIR, focusing on dynamic housing prices and different household profiles at a neighbourhood level, can guide cities on affordability. But as there is a lack of data to calculate it, ULBs need to conduct market surveys under the ARHC scheme to set rents.

Therefore, this is a right time to develop city housing datasets/dashboards that comprise granular data on housing prices, household incomes, prevalent rents, predominant typology and access to amenities, among other things. This will not only enable ULBs to understand the housing affordability scenario in cities, but will also guide policy discourse on future housing stock with a view to bridge the affordability gap.

Cap rents to suit the affordability of the poor: The Model Tenancy Act as well as the ARHC scheme provide for rents to be discussed mutually between tenants and the lessee or the owner. The CSE study found that rents for ARHCs are being set by the ULBs — but without bearing in mind a beneficiary’s capacity to afford the rents.

According to the rental housing market, rents yielding a rent-to-value ratio of 2 or above are favourable for the owner (and not the tenant) for its higher return as per the market price. Rents at a few ARHCs are way above this benchmark (up to 5.7 rent-to-value ratio); these could be completely unviable for the beneficiary.

ULBs and parastatals must prioritise equity over the economics of O&M; without this, the ARHCscheme to provide affordable access to quality shelter to migrant workers and urban poor will fail. ULBs and parastatals need to conduct market surveys and cap the rents for ARHCs based on the rent-to-value ratio so that it does not cross a ratio of 2.

Create a state regulatory framework for rental housing policy, including creation of a rent authority: As housing is a state subject, it is important to establish a regulatory framework at the state level for rental housing.

This is one crucial feature of the model tenancy act and ARHC scheme as well, that provides for creation of rent authority and rent courts to regulate and streamline the rental housing market in India.

State governments need to amend their rent control acts, formulate their own rental housing policy laying down targets and a strategy for construction of rental housing stock, and create dedicated bodies that look after regulation and implementation of rental housing. Rent authorities at the city level are needed to monitor and regulate rents in a bid to formalise rental housing in India.

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