India’s growth story hinges around, among other factors, domestic consumption and demography. Impetus to housing industry and facilitating younger generation to afford to consume the minimum comforts of life with relative ease will surely benefit the country to reap demographic dividends. In the year of affordable housing, making housing finance affordable would go a long way in making living conditions of the youth entering the profession or taking up a job after completion of education bearable. Typically, after a study period of 12+4/8 years, a person enters the earning bracket of say Rs. 18000-20000 per month to begin with an gradually move upwards.

This is the income level at which the affordable housing should be really affordable. It can be done through housing finance schemes by banks and other institutions which can have a repayment tenure upto say 50 years. Presently the tenure is between 15-20 years and rarely going upto 30 years. Extending the repayment upto 50 years will reduce the EMI (Equated Monthly Instalment) level and release the greater amount of the income of the borrower to meet other necessities of life. Banks, in order to protect the loans granted for such long terms can insist on insurance on the life of the loanee through a whole life policy which will provide the bank the necessary security for the liquidation of the loan amount in the eventuality of the unexpected death of the borrower. Since the life expectancy in India is around 55 years, the risk is covered for the lending bank. One, by way of life insurance policy and the other through appreciation of the house property mortgaged on a year on year basis.

In case of both husband and wife each falling in the income bracket, banks can formulate lending programs on a packaged basis with longer tenure in mind than the one presently offered. The package can include financing for white goods such as refrigerators, cars, air-conditioners, interiors etc. with tenure of say 15 years rather than the present 3-5 years period on these loans.

It is reported that the shortage of dwelling units in India is around 25 million units as of 2007, and 70% of this shortage is in the middle and lower income bracket. If only the buyers who fall in the younger age category are facilitated through affordable housing finance as suggested here it will mitigate supply shortage and one can even expect a price correction in the housing market. These measures are sure to attract entrepreneurs in the segment of affordable housing, costing from Rs. 5 lakhs to 30 lakhs from the peripheral areas to reasonably well developed areas with sufficient infrastructure support and amenities of daily life respectively and consequently will become the growth driver befitting the entire economy.

First time house buyers can be given an interest subsidy or finance at a reduced rate of interest as is the case with priority sector lending along with tax credits. Since generally the wages in India are subsistence wages and not living wages, across the cross-section of industry, subsidy in interest cost can release a part of the income for consumption of other basic needs such as education for children, health care and leisure activities.

In a place like Mumbai, even in the distant suburbs like Borivali or Thane, the dwelling units for the middle class are not priced below Rs. 5000 per Sq.Ft. in a reasonably developed locality. This makes a minimum living space of about 500 Sq.Ft. cost Rs 25 lakhs. If the repayment tenure for a loan of similar amount is at 25 years, the monthly principal repayment alone amounts to more than Rs 10000. Add the interest amount and the EMI turns very large putting pressure on meeting the other daily necessities of life. Hence, the need for loans with longer periods of repayment for this segment of the borrowers.

In order to lower the cost of such affordable housing the FSI (Floor Space Index) should be enhanced to the developer so that the cost is distributed over a larger constructed units thereby reducing the cost per unit which would reflect in the lower per Sq.Ft. price for the buyer. We can also think of cost plus pricing through cost audits for these affordable housing schemes to check the possibilities of profiteering by the realty developers.

The cost of stamp duty registration fees and other documentation should be kept at a minimum to lower the transaction cost. The exchequer can make up the loss of revenue through enhanced growth in the housing sector. The white goods sector will also compensate through increased consumption since easy finance will be available through the suggested packaged lending.

The mortgage market must be well developed and remedy in case of dispute should be quick and without loss of time. For the purpose appropriate authorities if required special courts must be established for speedy disposal of the cases. These measures would facilitate the development of an efficient, transparent and cost-effective housing mortgage market.

With the vast majority of the population still reeling under the pressure of low income, any policy measure that can help in increasing the consumption at the middle and lower income bracket should be welcome for achieving the double digit growth rate. Well thought out affordable housing finance will mitigate the problem of housing for the youth of this country. We must make a paradigm shift and tweak the finance policy to reap the demographic dividends. Even double digit growth rate will follow and be sustainable then.