India is grappling with a massive shortage of affordable housing, with an estimated demand for 30.7 million units by 2030, as published by Business Standard.
According to a recent Knight Frank report, the financial opportunity in this sector is valued at ₹67 lakh crore, spurred by urbanization, rising incomes, and growing employment opportunities.
Despite the growing demand, financing challenges persist. The report reveals that 95% of the demand will come from urban areas, particularly from economically weaker sections (EWS). However, limited funding inflows are hindering the sector’s progress. Policymakers and developers must consider solutions such as revising loan eligibility, offering tax incentives, and unlocking unused land to address these issues.
Knight Frank’s findings show that 95% of India’s affordable housing demand will be concentrated in urban centers, with 45.8% of the requirement coming from EWS households. The shortage of 10.1 million units intensifies this challenge, with the affordable housing market projected to need 31.2 million units by 2030, amounting to ₹67 trillion.
At present, the affordable housing loan market is valued at ₹13 trillion, with Housing Finance Companies (HFCs) holding ₹6.9 trillion and Scheduled Commercial Banks (SCBs) holding ₹6.2 trillion. The demand for loans in this sector is expected to increase, presenting significant opportunities for growth in financing.
The affordable housing sector is particularly reliant on loans. With 77% of affordable housing purchases expected to depend on loans, the sector could see ₹45 trillion in financing opportunities. However, funding remains a challenge. From 2011 to September 2024, only $1.6 billion in foreign direct investment (FDI) flowed into affordable housing, representing just 9.8% of residential sector capital inflows and 3.6% of total real estate investments. Furthermore, foreign investments in affordable housing are limited, comprising only 15% of private equity inflows into the sector.
Affordable housing in India is officially defined by the Ministry of Housing and Urban Poverty Alleviation (MoHUA) as housing units within reach of those with below-average household incomes. However, the price gap between the definition and the realities of the housing market continues to widen.
For example, affordable housing prices in Mumbai have escalated from ₹48 lakh in 2019 to ₹73 lakh in 2024, pushing units beyond the Reserve Bank of India (RBI) threshold for priority sector housing. Nationally, smaller housing units (under 30 square meters) are experiencing a price surge compared to larger units. In the Mumbai Metropolitan Region (MMR), the cost of a 30-square-meter unit rose by 55% from 2019 to 2024, while the price of larger units increased by 29%.
For EWS households, affordability has become a pressing issue. Knight Frank’s analysis shows that the home loan EMI-to-income ratio for a family earning ₹3 lakh annually has surged from 43% in 2020 to 62% in 2024, surpassing the Fixed Obligation to Income Ratio (FOIR) limit of 50%. This ratio constraint further limits EWS loan eligibility.
The current income eligibility for EWS is capped at ₹3 lakh per year. However, to afford a 30-square-meter home in a tier-1 city, an income of ₹6 lakh is needed. The income criteria should be revised based on regional cost of living to better reflect affordability.
The RBI’s priority sector housing limit for metro cities is ₹45 lakh, and ₹35 lakh for non-metro cities, set in 2019. However, the prices of homes in these regions have risen substantially since then, making the current thresholds outdated. Adjusted for inflation, the cost of homes in metro cities has risen to ₹57 lakh in 2024, and in non-metro cities to ₹44 lakh.
To meet the growing demand for affordable housing, several policy measures could stimulate supply. The Knight Frank report recommends unlocking unused public sector land, which could provide developers with cheaper plots, thereby reducing construction costs and lowering housing prices. An estimated 1.9 lakh acres of land would be required to meet the 31.2 million unit demand by 2030.
Increasing the Floor Space Index (FSI) by 50% could also help increase housing supply by 50% and reduce construction costs by 24%. Tax incentives for private developers are another critical proposal, as they would make affordable housing projects more financially feasible. While current tax breaks are limited to income tax exemptions for just one year, more substantial incentives, such as GST rebates and subsidies, could stimulate private sector involvement.
Developing satellite cities around metropolitan areas offers a promising solution to the housing shortage. Regions such as Panvel and Vasai Virar in Mumbai, Manesar and Sohna in Delhi NCR, and Hoskote and Devanahalli in Bengaluru could become hubs for affordable housing, providing lower-cost alternatives to congested urban centers. These areas should prioritize affordable housing through strategic land-use planning and zoning regulations.
As India’s manufacturing sector grows—forecasted to increase from $491 billion in 2023 to $975 billion by 2030—demand for affordable housing for industrial workers is also expected to rise. This presents an opportunity for developers to cater to this segment by creating affordable rental housing tailored to the needs of workers.
India’s affordable housing shortage is a pressing issue, but it also presents a significant growth opportunity for developers, banks, and housing finance companies. Through policy reforms, land use changes, and financial incentives, India can address the growing need for affordable housing, particularly for EWS households. As demand rises, these proactive measures are essential for making affordable housing accessible to millions of Indians.