Defining Affordable Housing Threshold

Affordable Housing Mar 25, 2022

Background

The Reserve Bank of India uses property prices to define affordable housing. The RBI classified housing units priced under Rs. 45 Lakhs as "affordable housing" in metropolitan cities. In non-metropolitan cities, housing units under Rs. 30 Lakhs are classified as affordable housing [1]. This fixed threshold does not take into account the fluctuating market prices. Other approaches try to incorporate factors such as household income levels, location, and economic situation to come up with a more holistic definition of affordability. Each of these definitions are well suited for different use cases. For instance, the RBI definition acts as a guiding value for banks in priority sector lending.

Some of the approaches that are used to define Affordability

In this blog post, we look at how two different methodologies based on registration prices can show divergent trends in the share of affordable housing. First we look at the findings from the TEAL Affordable Housing report which considered 45 Lakhs as the affordable housing threshold [6]. We will also look at how the share of affordable housing changes when we consider the affordable housing bracket based on distance from the median approach.

TEAL Analytics Affordable Housing Report

Our recent report on affordable housing used the 45 Lakh threshold to segment affordable housing. The report relied solely on TEAL data for the analysis which captures property registration prices. TEAL Analytics Affordable Housing Report looked at affordable housing in two sets of cities across the country. The first set is four major Tier-I cities: Mumbai City, Hyderabad, Pune, and Bengaluru. The second group consists of Satellite Cities or regions in the broader metropolitan areas of Mumbai and Delhi, that are important growth markets for affordable housing: a) Thane, Palghar, and Raigad, and b) Noida and Ghaziabad. For the report, we used RBI’s definition of classifying housing units priced under Rs. 45 Lakhs as "affordable housing". Considering this threshold, the share of affordable housing sales was lower than the previous years in major Tier-I cities, despite the overall property sales volume increase in 2021. Overall, 63%  of the total property sales volume in Mumbai City, Hyderabad, Bengaluru and Pune during 2017 - 2021 was in the Affordable Housing category [6].

Comparing Methodologies for Measuring Housing Affordability

According to primary research conducted by Deloitte Analysis, property value is one of the important attributes to define affordable housing [5]. The Reserve Bank of India (RBI) classified housing units priced under Rs. 45 Lakhs as "affordable housing". We have used this threshold for the TEAL Analytics Affordable Housing Report due to data availability and simplicity of the method.

Multiple approaches can be used to define affordable housing, and each methodology can yield different results. The purpose of this article is to compare two such methodologies in defining the affordable housing threshold, not to contradict one another. The first method is using the fixed threshold of Rs. 45 Lakhs for all years, as set by the RBI. This method was used in the analysis of our Affordable Housing Report. The second method is to adjust the affordable housing threshold for each year based on the fluctuations in the median property prices in each city. With this method, we can observe how the share of affordable housing changes with change in property transaction values in Mumbai City, Bangalore, Pune, and Hyderabad during 2017 - 2021. Comparing these two methodologies side-by-side illustrates how different methodologies can result in different thresholds.

Method 1: RBI classified Threshold for Affordable Housing of Rs. 45 Lakhs for All Years

Method 2: Adjusting the Affordable Housing Threshold Each Year Based on the Median Property Price

Taking 2017 as the base year where the affordable housing threshold is Rs. 45 Lakhs (as per RBI definition), the threshold was adjusted in the following years proportional to the change in median property prices in each city.

Interpreting the Visuals in the following section:

For every city in the analysis, the property prices have been visualized in a distribution plot - shows how the property prices are distributed at different price points. A higher curve indicates a higher number of transactions under that price point.

The distribution plots for each city has been divided into two sections:

  1. Distribution of property prices with RBI’s definition of affordable housing (below Rs. 45 Lakhs)
  2. Distribution of property prices with adjusted affordable housing threshold based on the change in median property price.

Indicators within the distribution plot visuals:

  1. The red line marks the affordable housing threshold.
  2. The percentage value in the circle represents the share of transactions in the affordable housing segment. It is important to note that this value changes compared to the Rs. 45 Lakhs threshold as we adjust the threshold.
  3. The black dotted line indicates the median property price.

Mumbai

Among the Tier-I cities analyzed, Mumbai recorded the lowest share of property sales in the affordable housing segment. Property prices in Mumbai are generally higher than the other cities. From January 2017 to December 2021, only about 22% of the property sales were in the affordable housing segment.

Median Property Price in Mumbai (2017 - 2021)

Source: TEAL Data

Affordable Housing Threshold in Mumbai

In 2019 and 2020, the median property prices in Mumbai were lower than the values recorded in 2017 and 2018 respectively. This brought the affordable housing threshold lower than the base price of Rs. 45 Lakhs. 2021, however, registered the highest median property price during the period of 2017 - 2021. Hence, 2021 has a higher affordable housing threshold than Rs. 45 Lakhs.

Source: TEAL Data

Bengaluru

Median Property Price in Bengaluru Urban (2017 - 2021)

Source: TEAL Data

Affordable Housing Threshold in Bengaluru

In Bengaluru, the median property price in 2018 was lower than the price in 2017. This resulted in the affordable housing threshold being lower than Rs. 45 Lakhs. For the subsequent years (2019 - 2021), the median property price kept increasing with all three years having a higher median price than in 2017. Consequently, the affordable housing threshold was also calculated to be higher than Rs. 45 Lakhs during 2019 - 2021.

Source: TEAL Data 

Pune

Median Property Price in Pune (2017 - 2021)

Source: TEAL Data

Affordable Housing Threshold in Pune

From 2018 through 2021, the median property price in Pune was higher than the median price recorded in 2017. This ensured that the adjusted affordable housing threshold from 2018 to 2021 was higher than the base price of Rs. 45 Lakhs, with the threshold changing per the percentage change in median property price.

Source: TEAL Data

Hyderabad

Median Property Price in Hyderabad (2017 - 2021)

Affordable Housing Threshold in Hyderabad

Similar to Pune, Hyderabad also witnessed higher median property prices from 2018 to 2021 than the median property price in 2017. Accordingly, the affordable housing threshold was calculated to be higher than Rs. 45 Lakhs in these years.

Source: TEAL Data

Reference

[1] https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=11959

[2] https://www.jchs.harvard.edu/sites/default/files/Harvard_JCHS_Herbert_Hermann_McCue_measuring_housing_affordability.pdf

[3] http://www.krinstitute.org/assets/contentMS/img/template/editor/Views%20-%20Median%20Multiple.pdf

[4] https://rbidocs.rbi.org.in/rdocs/Bulletin/PDFs/AFFORDABLE609D506CB8C247DAB526C40DAF461881.PDF

[5] Deloitte Report - Defining “Affordable” Housing Finance,

https://www2.deloitte.com/content/dam/Deloitte/in/Documents/finance/AHF-Need-for-defining.pdf

[6] TEAL Analytics Affordable Housing Report,

https://www.tealindia.in/research/affordable-housing-report


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