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Why Budget sops won’t lure private developers into affordable housing

Jan 17, 2025 11:06 AM IST

What’s pricing real estate developers out of affordable housing? It’s the cost of land, approvals and construction that makes it almost impossible

Every year, as the Union Budget approaches, real estate industry leaders rally behind the same battle cry: "Give us the tax breaks so we can build more affordable houses for India."

In her column "Let's Get Real," Manisha Natarajan writes that the cost of land, approvals, and construction makes affordable housing almost impossible.
In her column "Let's Get Real," Manisha Natarajan writes that the cost of land, approvals, and construction makes affordable housing almost impossible.

Niranjan Hiranandani, following his pre-budget consultation with Finance Minister Nirmala Sitharaman, expressed concern over a troubling milestone in his 40-year career: a degrowth in affordable housing.

The numbers back his unease. Propequity data reveals a sharp 24% drop in launches of homes priced below 60 lakh in the top seven metros by private developers over the past two years—a clear indication that supply is shrinking.

But let’s get real: no matter what incentives the government doles out, the country’s top developers will be loath to launch projects of flats priced at 40–50 lakh in India’s top cities. These aren’t the homes that the foot soldiers of urban India—home helpers and drivers earning 20,000– 25,000 a month—could ever afford. That’s EWS (Economically Weaker Section) housing, which is an entirely different conversation around decoding the ‘claimed’ success of Pradhan Mantri Awas Yojana or PMAY.

Here, we’re talking about the vast middle-income segment: families and younger corporate workers earning 12–15 lakh annually. They might stretch to spend up to 35% of their income on EMIs, living frugally, to buy a 50-lakh home.

Even then, they would be reluctant to commit to a 45-lakh loan (assuming a 5-lakh down payment) because of the daunting EMI of roughly 40,000 a month.

What’s Really Pricing Developers Out of Affordable Housing

Going back to private developers, it’s really the cost structure that makes affordable housing impossible. Let me explain.

1. Land Costs

Post-COVID housing demand has emboldened landowners. They’re holding firm, waiting for prices to peak. Take a look at Dwarka Expressway, considered a mid-income housing market of Delhi-NCR. Land rates there have skyrocketed, with prices climbing from 8–9 crore per acre to 35 crore per acre in just four years.

Prime locations, such as Thanisandra, Hennur, and Whitefield in Bengaluru have seen a similar increase and rates now range between 30–40 crore per acre. Pick any flourishing residential market in a top-tier metro and you will see land rates have soared by 150-300% in the past four years.

Here's the thing about land—it’s often aggregated over the years, if not decades, by landowners and at dirt-cheap prices. They’re in no rush to sell.

On the other hand, developers, especially the big listed ones, are under constant pressure to show business growth. So, they keep buying at higher prices, and even when business cycles slump, land deals tend to slow down, but they don’t stop. Prices of apartments barely budge.

2. Approval Costs

Despite the noise around single-window clearances, approval processes remain an ordeal. Building plans, environmental clearances, water, electricity, and fire safety licenses—each step is mired in inefficiency and delay. Borrowed capital accrues interest while developers wait, inflating costs further. And yes, the hidden graft costs in this business remain as persistent as ever. More importantly, as land prices rise, so do ready reckoner rates. Since development charges paid by builders to municipal corporations are linked to these rates, the overall costs escalate further.

3. Construction Costs

Labour shortages are crippling the industry. Skilled workers are scarce, and as per a Colliers report, labour costs have risen by 25% in residential real estate in 2024 alone, and average construction costs overall are up 11%. Developers increasingly cite labour shortages as their top operational hurdle, overtakingapprovals.

4. Sales and Marketing Costs

Salaries, advertising, and promotions—these expenses are inflation-linked and only rise, when demand softens. Early signs of a slowdown in housing sales in the October- December 2024 quarter suggest these costs will climb further, squeezing margins tighter.

Where Does That Leave Mid-Income Affordable Housing?

The short answer: Developers might push mid-income housing to the far-flung suburbs or even beyond. That would coax only a handful of smaller, local players to take the plunge. What about larger developers? Thanks, but no thanks. The thin margins and sketchy viability just don’t add up.

What Could Actually Help?

There is still one community of buyers that could be tapped. The mid-income families and younger buyers joining the workforce in top-tier cities, the ones who can stretch to homes priced at 60 lakh- 75 lakh. But for that to happen, a few policy changes are needed.

Tax Deduction on Home Loan Repayments

Currently, the principal component is deductible under Section 80C, and the interest (up to 2 lakh) under Section 24(b). Raising this cap to 5 lakh for both principal and interest would ease the financial burden on homebuyers, especially as home loan rates have climbed by 2% in the past two years.

Reintroduction of Credit Linked Subsidy Scheme

For households earning 6–12 lakh annually, the MIG-I (middle income group) category under the Credit Linked Subsidy Scheme (CLSS) offered a 4% interest subsidy on home loans up to 9 lakh for homes priced at 40 lakh or below, with a maximum carpet area of 160 sq. m. (1,722 sq. ft.).

There is merit in restoring the CLSS scheme, which ended in 2023. Reviving it for first-time buyers and raising the price limit of what is considered mid-income to at least 60 lakh, is something the finance minister must consider.

Tax Incentives for Developers

Reintroducing the 100% tax exemption under Section 80-IBA for affordable housing projects, paired with realistic sales price caps and higher FAR (Floor Area Ratio) limits. This could coax local developers into launching projects in this price bracket.

But here’s the kicker. Even with these measures, the credible names and even those dominating the market today won’t jump in. Margins are too slim, and the risks are high. Developers like Signature Global have already pivoted away from this segment

So, the next time you hear developers’ wish list from Union Budget 2025 in the name of affordable housing, take it with a pinch of salt. Affordable housing for mid-income India will remain a pipe dream unless systemic, structural shifts occur. Those, sadly, are nowhere on the horizon.

Manisha Natarajan is a well-known editorial voice in Real Estate and Sustainable Built Environment.

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