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How can the common man own a house?

By T N Ninan
June 15, 2009 18:08 IST
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Back in 2000, the average Briton could hope to buy a house with four years' salary. By the middle of the decade, as real estate prices rose, the Britisher needed seven years' earnings to pay for a typical house; and in 2007, at close to the height of the housing boom, a government-backed housing body warned that a house could cost 10 years' salary--making home ownership an impossible dream for many.

So is there a link between income and house cost? If we assume there is, what should the relationship be? Research by a United States non-profit body that looks at housing issues says that affordability should be defined as a house that costs about three years' salary--assuming 10 per cent down payment on the house and 28 per cent of the salary going towards the mortgage payment.

HDFC says that the multiple that operates for housing in a Mumbai suburb is between 4.5 and 5.25 times annual salary.

If 85-90 per cent of the cost of a flat is taken as a loan, and a 15-year loan has a monthly repayment instalment that is 1 per cent of the loan amount, then simple arithmetic tells us that 40 per cent of income is needed to pay back the loan.

Now, the average (or median) Indian family earned about Rs 1.31 lakh (Rs 131,000) last year, or Rs 11,000 a month. Can it afford to pay Rs 4,400 every month on a housing loan, for a modest one-bedroom flat that costs Rs 6.5 lakh (Rs 650,000)? Probably not.

But if it could, or if it had a little more income, would it get a flat for Rs 6.5 lakh? Not in the big cities. The Delhi Development Authority, which is not known for quality work, sells a one-bedroom flat (450 sq ft) for Rs 8-10 lakh (Rs 800,000 to Rs 1 million); the open market rates are at least twice as high.

So it is easy to see why most middle-class Indians see home ownership as a distant dream.

But hold it; flats are now being offered for Rs 4 lakh (Rs 400,000) by Tata Housing (covering 280 square feet, which may mean a room plus kitchen). A 450-square foot (one-bedroom) flat would cost the magical sum of Rs 6-7 lakh (Rs 600,000-700,000).

Jerry Rao, the banker-turned-IT entrepreneur-turned-housing evangelist, has set up a housing company that will offer flats for Rs 7 lakh--with construction cost in the region of Rs 700 per square foot. These entrepreneurs seem to be dropping the total cost from Rs 2,000 per square foot to Rs 1,500.

If they are successful, others are bound to follow their lead. And housing might then become affordable for the average Indian, if not quite the aam aadmi that the politician has in mind.

The big real estate companies, which have been focusing on housing that costs Rs 4,000-6,000 per square foot and more, have seen the light--in part because they have found no takers in today's real estate slump. So they have slashed prices, in some cases by a half, and have been rewarded with a rush of buyers.

The problem in India is that much of the cost of the roof over your head is on account of the land beneath your feet--which has been kept hopelessly expensive by the politician-builder nexus.

This has prevented more land from coming into the housing market, which is why upscale flats in Delhi and Mumbai rival the costs of those in Manhattan (where the typical flat costs Rs 6 crore -- Rs 60 million).

If more land were thrown into the market, home ownership would not remain a dream for the majority, it would become reality.

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T N Ninan
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