Deepak Parekh on Affordable Land and Housing

Deepak Parekh
Deepak Parekh
(The following are excerpts from a speech on Affordable Land and Housing delivered by Mr Deepak S Parekh, Executive Chairman, HDFC, at the Habitat Business Forum in Delhi on July 7, 2009.)

India and China are going to be the economic torchbearers as the world slowly recuperates from arguably, the greatest financial crisis in the modern era.

Housing plays a pivotal role in the economy and its importance can be gauged from the fact that the global financial crisis had its roots in the US housing sector. The US had always been credited for its well developed, sophisticated housing finance market and perhaps no one envisaged the enormity and snowball effect of this crisis.

But when one looks back, certain fundamentals went completely awry. The crux of the mortgage crisis was that prudent lending norms had been disregarded, structured financial products had become so complex that few were able to understand the risks associated with these instruments, there were regulatory lapses and lastly, the greed factor led to excessive risk taking.

The collapse of several leading financial institutions had its repercussions across all financial markets and the total expected write downs on global exposures is now expected to be in the range of US $ 4 trillion.

The global financial system is strongly interlinked and this has debunked the decoupling theory. But the impact of the global financial crisis varies from country to country. In many western economies, the financial sector's largest exposures were in the housing and real estate sector, which is not the case with say, China or India. Both China and India continue to have low mortgage to GDP ratios at 11% and 7% respectively and the demand for housing continues to remain enormous in these rapidly growing nations.

Fortunately, the importance of housing has been recognised by the governments of both these countries.

The Chinese economy has benefited from the government's mega stimulus package of US$ 586 billion. In an effort to promote affordable housing for the urban poor, the Chinese government's stimulus plan includes a pledge to build 5.2 million low-rent homes over the next three years and subsidise housing for 7.5 million poor urban families. A total of US$ 59 billion is earmarked for affordable housing projects and US$ 54 billion on improving rural living standards.

Despite India being the second fastest growing economy, its Achilles' heel has always been the state of its infrastructure and the acute shortage of housing. To the discerning eye of a visitor to India, the rapid economic growth is not reflected in the quality of urban infrastructure or civic life.

India is urbanising at a pace that is higher than the world average. Its cities today are unable to cope with the burgeoning population. Projections indicate that by 2030, more than 40% of the country's population will be residing in urban areas compared to the present 28%.

Economic development and urbanisation are inextricably linked. Cities have created employment opportunities and are generators of wealth, with 55% of the country's GDP being contributed from cities. But as the housing stock is unable to keep pace with the demand, the result has been an environment of mushrooming unauthorised construction, congestion, proliferation of slums and degradation of the urban living experience. Adding to these woes is the severe shortage of basic amenities, with scores of citizens continuing to be without power, water and sanitation.

The Indian government recognises the challenges it faces on housing, particularly on account of the rising pace of urbanisation. While the government has initiated several measures and programmes to deal with these challenges, one has to appreciate that solutions are not easy given the huge shortage of housing in India. Again, there are large income disparities, which means that different solutions need to be sought for different income groups.

Take for instance the fiscal incentives offered by the government on a housing loan. This has helped scores of middle-class Indians to realise their dreams of owning a home. For example, if the interest rate on a housing loan is 9.25% p.a. and if one factors in the fiscal concessions of interest exemption of Rs. 1.5 million and the deduction of the principal component of Rs. 1 million, the effective rate of interest paid on a housing loan for a tax paying individual comes down to less than 4% p.a. This serves as a tremendous saving for the individual.

It is uplifting to hear President Pratibha Patil set the tone with an ambitious target of making India slum-free in the next five years. The ground reality is that there is an urgent need to take some hard decisions, but in my opinion it is not beyond the grasp of the new government.

The top priority of the government should be to ensure the reintroduction of the Land Acquisition Amendment Bill and the Rehabilitation and Resettlement Bill, despite the new political noises being made. SEZs have become a non-starter, road and airport projects have been hindered and industrial projects have been delayed due to land acquisition related issues.

The total urban land stock in India is only 2.3% of the country's total geographical area, but houses 30% of the country's population. At a policy level, there is a need to bring in additional urban lands on a regular basis. The process of land acquisition and conversion of agricultural lands for urban use also needs to be simplified.

The affordable housing agenda is extremely challenging, but solutions can be found through inter supportive public private arrangements. The private sector has to be incentivised to participate in this segment, while the government has to create the enabling environment. To that effect, the slum rehabilitation schemes have worked well - the developer provides the slum dwellers with permanent structures, typically a one- room tenement with an attached bathroom free of cost, while the developer benefits from the surplus land which can be used for commercial purposes. Going forward, it is imperative that the government rationalise stamp duties, review processes for master planning, provide for upward increases in FSI, which is commensurate with investment in infrastructure and encourage more in-situ development.

State housing boards can also play an important role. One can cite the recent success cases of state housing boards like the Maharashtra Housing and Area Development Authority (MHADA) or the Delhi Development Authority, which offered flats at prices that were within the common man's reach. The number of applications received for these homes is testimony of the immense demand.

Sometimes, however, state housing boards tend to shift their focus from providing housing to merely selling land for profit. The housing board either sits on these huge cash surpluses or the funds get passed on to the state government which, in turn, gets deployed in other areas, besides housing. It is imperative that such profits be ring-fenced and deployed for affordable housing only. Given the huge demand for homes built by state housing boards, they should ramp up their scale of operations and ensure that more affordable homes are built faster.

There is also merit in the Urban Development Ministry's proposed "reverse tendering" plan wherein state-owned land would be provided at a pre-determined price and expressions of interest would be invited from private developers for building homes at the lowest possible price. This would go a long way in providing housing to the middle and low-income groups, without the risks of speculation creeping in through artificially inflated land prices.

Personally, I am sceptical whether the present breed of developers will stay committed to the affordable housing segment. Certain top rung developers have already started increasing prices, especially in mid-income projects, following the recent pick up in sales. Besides, with liquidity no longer being a constraint, certain developers are seeking to once again increase their margins.

The real estate market had just begun correcting itself and it would be extremely unfortunate if developers were to increase home prices at this juncture. Over the longer term, I envisage that the affordable housing segment will belong to dedicated niche players. We already have a few such examples, but to increase scale, these players may need to be appropriately supported and incentivised.

A point that I have repeatedly raised is the compelling need to introduce a real estate regulator, whose role would be to oversee and monitor the affordable housing agenda, promote real estate reforms and act as a platform to protect buyers from real estate fraud.

Why should it be difficult for the government to insist that all flats be sold only on the basis of carpet area, which is the actual liveable space? Why is the idea of a real estate regulator, which can protect a homebuyer, be resisted at all? For instance, our regulators for various financial products and services are extremely vigilant in protecting customers, but in the case of buying a home, which is the single largest investment made by a person in his or her lifetime, there is no regulator or even an Ombudsman-type body to redress instances of real estate fraud. A real estate regulator will immensely help this sector.

Let me briefly turn to financing aspects. The demand for housing finance continues to remain immense and one is hopeful that the surplus liquidity within the system will provide scope for some softening of interest rates in the ensuing period.

India has prided itself on its robust financial system which largely remained insulated from the global financial meltdown. The central bank has been credited for its vigilance on the real estate market and for its pre-emptive measures such as increasing risk weights on commercial real estate loans and provisioning requirements to prevent the build-up of an asset bubble.

But given the dynamic and constantly changing environment, India cannot rest on its laurels. The time may be apposite for India to perhaps take a leaf from the European Commission's recent draft on "Responsible Lending Standards for Home Loans." It is important to recognise that responsible lending for home loans must aim at not only providing the initial access to housing through credit for borrowers, but must keep in mind the long-term objective, which is keeping borrowers in their homes. These standards set out mutual obligations on the part of borrowers, credit intermediaries, lenders and regulators.

It is of utmost importance for a lender to provide adequate, transparent and understandable information to prospective home borrowers. An information overload must also be avoided. A customer must be educated sufficiently on a home loan product, (more so if it is a complex structure) so as to enable him or her to make a well-informed decision. Asset quality should always be the overriding factor. Landing up with excessive non-performing loans may be a drag on the financial system, but de-housing unintentional defaulters on account of mis-selling as we have seen in the US, is a path that India can ill-afford to follow. These are lessons we must keep in mind.

Across all income segments, man's dreams and aspirations remain the same - that of striving for a better quality of life. I am optimistic to believe that housing finance solutions can be found. There is no reason to believe that commercial financial institutions cannot finance low-income borrowers.

For instance, as long as there is a verifiable income source and a clear title to the property, commercial institutions must play their role. At the very bottom of the income group, government support is vital. So through public and private support, I am optimistic to believe India can successfully "straddle the pyramid".

By straddling the pyramid, one means that different sets of housing solutions can be found for different income segments. India is fortunate to have a number of visionary policymakers, intellectuals and professionals who are all trying very hard to find the right solutions. While the 20th century was called the "age of urbanisation", the 21st century may well be termed as the "age of sustainable urbanisation."

(Mr Deepak S Parekh is the executive Chairman of HDFC. He is a Fellow of the Institute of Chartered Accountants (England & Wales). Mr. Parekh joined HDFC in a senior management position in 1978. He was inducted as a wholetime director of the Corporation in 1985 and was appointed Chairman in 1993. He is the chief executive officer of the Corporation.)
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