Bottom Line: Enhancement of the carpet area of houses for the Middle Income Group (MIG) category, under the Pradhan Mantri Awas Yojana – Urban (PMAY-U) fails to address the larger concerns.
With the Government of India approving an increase in the carpet area of houses for the two middle-income group categories, under the Pradhan Mantri Awas Yojana – Urban, the industry stakeholders are getting euphoric as if this is the panacea for the ills that the afflicted the business.
An impression is being created that the new norms would revitalize the real estate market and the standing housing inventory would be absorbed much sooner than expected.
A closer look at the top ten cities and the price point clearly suggests that the move would hardly make an impact over the housing dynamics in the cities. Many of the Tier-II cities also defy economic rationale to support the industry-anticipated benefits. Across section of homebuyers are hence not enthused with the move; even calling it out of sync with the market realities.
Amit Nagarjuna is buying a 950 sq feet (88.25sq meter) apartment in Malad, Mumbai. Will he now go for a 340 sq feet additional space to avail the benefits of new policy incentive? He just laughs it out and rather asks a counter question, “Do you know the cost of property in Mumbai? Can you imagine my loan amount for this property?”
Well, for a person like Amit who is buying an apartment at the cost of INR 2 crore with a bank loan of INR 1.4 crore such announcements mean nothing.
Similarly, Shweta Mehrotra, a homebuyer in Noida that is most affordable property market among the top 10 cities, is buying a 1200 sq feet (111.4 sq meter) apartment at a cost of INR 80 lakh. Her bank loan is INR 60 lakh. Would she get tempted to buy a 1600 sq feet (148.6 sq meter) apartment at the cost of INR 1,10,000 and get benefitted with the new announcement?
“I fail to understand why everyone is going gung-ho with a policy announcement that hardly touches the majority of homebuyers. I don’t think in the cities today anyone who falls into the income of up to INR 12 lakh or INR 18 lakh would be in a position to think of buying a bigger house and take extra debt burden just to avail a few hundred or a thousand rupees lesser EMI,” says Shweta.
Why PMAY scheme for larger carpet area won’t work?
Property prices beyond the affordability index for sub INR 12-18 lakh annually earning buyers
Instead of offering larger carpet size, the policy should have increased income level or subsidy level to reach out to masses
The tangible gain with the scheme is only a couple of thousand rupees that is too less in EMI burden for houses
Most of the homebuyers across the country are of the opinion that instead of increasing the carpet area, that is mostly availed by the financially well-to-do buyers, had the government increased the income level or the subsidy level that would have encouraged more homebuyers.
A back of the envelope calculation by Track2Realty, real estate think-tank group, finds that most of the sub INR 12 lakh yearly earning buyers anyway are not in a position to buy more than 1000 sq feet (92.2 sq meter) of houses. Similarly, majority of the buyers with earning under INR 18 lakh yearly prefer to buy around 1200 sq feet (111.4 sq meter) or at the max 1400 sq feet (130 sq meter) of houses.
In terms of the financial calculation, it is a globally accepted norm that any house that costs more than five years of gross income with the second simultaneous condition of not commanding more than 50% of take-home salary is not affordable. With the given conventional wisdom of affordability, if a house costs INR 80 lakh (considering 1000 sq feet or 92.2 sq meter as the lowest base) for a buyer having INR 12 lakh annual earning, it is a huge liability.
The financial calculation clearly suggests that the size of the house cannot be exceeded by majority of the buyers with the PMAY reducing the EMI liability a few hundred rupees.
The industry stakeholders are nevertheless trying best to create a positive vibe around the scheme. Jaxay Shah, President, CREDAI-National, opines that Housing for All by 2022 has taken a huge leap forward by the increase in unit size of MIG Houses under Credit Linked Subsidy Scheme. The average middle class in smaller towns and cities would now be able to afford bigger and better quality homes than before.
“On the supply side, private developers have improved incentives to increase scale and contribute to bringing about of New India. CREDAI compliments the government on relentlessly pursuing a progressive and inclusive agenda on housing,” says Shah.
Gagan Banga, VC & MD, Indiabulls Housing Finance echoes the similar sentiment when he says that the cabinet’s decision is a massive positive for the macros of housing. The homebuyer now has a larger pool of prospective houses to choose from. The fence sitters specially, who were delaying their home purchase will now be given a further push.
“Builders, meanwhile, will not only enjoy the general uptick in the market that is ahead of us, but can also accelerate the sale of housing units which were earlier missing out on a sizeable portion of the Middle Income Group audience,” says Banga.
Even if one takes into account the stakeholders’ concern for the Tier-II cities getting benefitted with the scheme, property prices in most of the cities clearly indicate that the policy will not make any tangible result. Moreover, many of the Tier-II cities, like Patna, Lucknow, Jamshedpur, Bhubaneswar and many others for instance, have peaked the property price point to the extent of being more or less at Delhi-NCR level. Instead of offering larger carpet area for a small set of homebuyers, the policy should have been framed to offer larger financial assistance to even larger number of people.
By: Ravi Sinha