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Chapter-III
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CHAPTER - III
Demand for Urban Housing
Urban housing demand is a reflection of households’ desire to live in cities.
Global demand for housing is expected to increase about 2.5 per cent per annum
through 2011, generating the construction of approximately 60 million new housing
units.1 More than 2 billion people will be added to the number of urban dwellers in
the developing countries over the next 25 years.2 This implies an unprecedented
growth in the demand for housing, water supply, sanitation and other urban
infrastructure services. Close to 3 billion people, or about 40 per cent of the world’s
population by 2030, will need to have housing and basic infrastructure services. This
translates into completing 96,150 housing units per day or 4000 per hour.3 The
housing crisis is already with us. Providing these services to new residents will be
essential if this additional population is not to be trapped in urban poverty, poor health
and low productivity. It is an urban problem with significant macroeconomic
consequences.
The factors which affect the demand for housing are not the same as the
factors affecting other consumer goods. Housing is one of the most durable and
expensive asset which provides many kinds of services such as shelter, security,
comfort, feeling of independence, social status and privacy. Housing stock may be
defined as the fixed capital stock that is accumulated for the purpose of sheltering the
population. On the other hand housing services can be thought of as the services
implied by the use of the housing stock.
The distinction between the housing stock and the flow of services it yields
over a period of time provides the basis for two measures of value. These are rent and
price of the housing unit. Rent is the payment made for a flow of services received
over a specified period of time and price is the capital value associated with a
particular unit of the stock.4
The aggregate demand for housing is determined by many factors such as
income, price, number of persons in the household, travel time to reach work place,
age structure of the members of the household, real wealth of the household, rate of
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growth of population, rate of household formation, rate of urbanization, etc.5 The most
important factors that really affect the demand for housing are the price of a dwelling
unit and purchasing power of the buyer. The aggregate supply of urban housing is
related to the prices of quantities of inputs of factors of production. The most
important one is land. The housing supply is assumed to be a function of the cost of
land and building construction, tenure and availability of funds.6
Demand for Urban Housing:-
The major factors that are driving the housing demand in India and China are
the growth of population and rising urbanization, the growing number of nuclear
families causing a perceptible lowering of the household size and increasing
affordability has driven households to invest in larger houses, thereby increasing area
requirements as they shift into the higher income class. Population growth has a direct
bearing on the requirement for housing units and, through this, on Floor Space Area
(FSA) requirements. The table 3.1 below summarizes the independent (all other
things remaining constant) impact of each of the demand driver on the overall housing
demand.7
Table 3.1:-Demand drivers and impact on housing demand
Demand Units Floor Space Area
Driver Demand Demand
Population growth ▲ ▲
Urbanization ▲ ▲
Nuclearisation ▲ ▲
Affordability ▲ ▲ Source:- CRISIL Research 2006
1. Growth of population and rising urbanization:-
The most important factors which affect the demand for housing is the rate of
growth of population and the rising urbanization. Population growth is putting
pressure on housing provision in India and China. Out of the ten most populous
countries, six are Asian countries where China and India rank first and second
respectively. According to table 3.2 India was home for 1,009 million people whereas
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China was for 1,275 million people in 2000. In both the countries the population is
expected to increase further and will touch 1409 million in India and 1485 million in
China in 2030. Rising slums, squatter settlements in cities is a sign of housing demand
not being met through formally housing stock:
Table 3.2: Urban Population in the 10 Most Populous Countries
Country
1950 2000 2030
Per cent Urban
Population (mn)
Per cent Urban
Population (mn)
Per cent Urban
Population (mn)
1 China 12.5 555 35.8 1275 59.5 1485
2 India 17.3 357 29.0 1009 40.9 1409
3 USA 64.2 158 77.2 283 84.5 358
4 Brazil 36.5 54 81.2 170 90.5 226
5 Indonesia 12.4 79 41.0 212 63.7 283
6 Nigeria 10.1 30 44.1 114 63.6 220
7 Pakistan 17.5 40 33.1 141 48.9 273
8 Mexico 42.7 28 74.4 99 81.9 135
9 Japan 50.3 84 78.8 127 84.8 121
10 Bangladesh 4.3 42 25.0 137 44.3 223
Source:- United Nations (2002)
Urbanization in developing countries is occurring at intense speeds. The
increase in urban population is not due to the extension of the boundaries of urban
areas but also due to the increase in the population of the existing urban areas. This
increase has resulted in greater demand for housing. Devendra Gupta has mentioned
in his book that the increased demand for housing is met in several ways:-through
new constructions, through more units created from the existing housing stock, with
house owners moving in to smaller apartments and through sub tenancy and through
squatting.8
According to the United Nations Population Fund (UNFPA), India is getting
urbanized at a faster rate and by 2030 more than 41 per cent of the country’s
population would be living in urban areas.9 According to table 3.3 given below, 29
per cent of India’s area was urban in 2005 as against the 41 per cent of Chinese urban
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area. The urban population of India and China were estimated to stand at 316 million
and 536 million respectively in 2005. During the last sixty years, post independence
the population of India has grown two and a half times, whereas urban India has
grown by nearly five times. By 2050, almost 875 million people or 54 per cent of
India’s estimated population in 2050 will live in urbanized cities, according to a
report, “Opportunities in an Urbanising World,” Credit Suisse.10 China leads the
urbanization race worldwide. It is estimated that by 2050, the urban population is
likely to reach 1-1.1 billion, with an urbanization level as high as 75 per cent.11
Table 3.3: Urbanization Trends in Asia, 1950–2030
GDP per
capita
(PPP, US$)
2003
Population
(million)
2005
Urban
Population
(million)
2005
Proportion Urban Estimated Increase in
Urban Population
(%)
1950
(%)
2005
(%)
2030
(million)
2005–2030
(%)
2005–
2030
World 6,453.6 3,172.0 29 49 61 1,772.7 56
Asia 3,917.5 1,562.1 17 40 55 1,102.2 71
Malaysia 9,512 25.3 16.5 20 65 78 10.8 66
Thailand 7,595 64.1 20.8 17 33 47 14.6 70
PRC 5,003 1,322.3 536.0 13 41 61 341.6 64
Philippines 4,321 82.8 51.8 27 63 76 34.8 67
Sri Lanka 3,778 19.4 4.1 14 21 30 2.4 59
Indonesia 3,361 225.3 107.9 12 48 68 80.0 74
India 2,892 1,096.9 315.3 17 29 41 270.8 86
Viet Nam 2,490 83.6 22.3 12 27 43 24.5 110
Pakistan 2,097 161.2 56.1 18 35 50 79.3 141
Cambodia 2,078 14.8 2.9 10 20 37 5.8 197
Bangladesh 1,770 152.6 38.1 4 25 39 48.4 127
Lao PDR 1,759 5.9 1.3 7 22 38 2.3 177
GDP = gross domestic product, Lao PDR = Lao People’s Democratic Republic, PPP = purchasing power parity, PRC = People’s Republic of China. Sources: - United Nations, World Population Prospects: The 2002 Revision; World Urbanization Prospects: The 2003 Revision; and United Nations Development Programme, Human Development Report 2005.
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The rapid urbanization in many developing countries over the past half century
seems to have been accompanied by excessively high levels of concentration of the
urban population in very large cities. The increased number of mega cities due to
urbanization has further worsened the problem of housing demand. Twenty years ago,
there were 245 mega-cities around the world. Today, there are 375.12 Today,
developing countries have twice as many mega-cities as developed countries. By the
year 2015, an estimated 40 per cent of the world’s urban population will live in mega-
cities.13 Of Asia’s mega cities, three are in India and two in China. Newcomers Davao
and Cebu are growing far more rapidly and may achieve mega city status within the
next ten years.
Table 3.4:-Asia’s Mega Cities (population in million)
City Population
Mumbai, India 18,2
Delhi, India 15,0
Shanghai, China 14,5
Kolkata, India 14,3
Jakarta, Indonesia 13,2
Dhaka, Bangladesh 12,4
Beijing, China 10,2
Manila, Philippines 10,7
Source:- UN DESA 2006
Urbanization in Asia involves around 44 million people being added to the
population of cities every year and that ‘many Asian cities are doubling in size every
15-20 years. The evidence on the population growth of urban centers suggests that
medium-sized cities in the order of 500,000 to 2 million will experience the highest
urbanization rates in the future.14
It may be seen from the Table 3.5 which shows the city size and population
growth of China and India in 2000, the number of cities with over a million
population reached 93 and 33 respectively.
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Table 3.5: City Size and Population Growth in China and India
(For Capital Cities and Urban Agglomerations with 750,000 Persons or
More in 2000)
PRC INDIA
City Size
Cities
(No.)
Av. Annual Growth Cities
(No.)
Av. Annual Growth
Percentage
2005–2010
Percentage
2010–2015
Percentage
2005–2010
Percentage
2010–2015
0–0.5 million
0.5–1 million
1–5 million
Over 5 million
126
127
93
4
1.80
2.03
1.25
0.77
1.91
2.08
1.45
1.04
157
45
33
7
2.04
2.45
2.79
2.30
2.18
2.36
2.52
2.12
Av. = average, no. = number. Source:- UN, World Population Prospects: The 2002 Revision and World Urbanization Prospects: The 2003 Revision.
Large cities have been the focus of both population and economic growth.
Each country now has three mega cities with populations over ten million: Beijing
(12.4 million), Shanghai (15.4 million), and Chongqing (15.2 million) in China; and
Mumbai (16.4 million), Kolkata (13.2 million), and Delhi (12.8 million) in India.
China has five additional cities with populations over 5 million (Guangzhou, Tianjin,
Xi’an, Chengdu, and Wuhan), and India has three such cities (Chennai, Hyderabad,
and Bangalore). Overall, China has 174 cities with populations of over a million, and
India has 35 cities that large.15 The rapid growth of both Chinese and Indian cities
has dramatically increased demand for land for housing.
It is the smaller and intermediate-sized cities that are frequently experiencing
rapid population growth and these are also often the most poorly resourced to
accommodate this growth. Even within cities, growth is not uniform and has
aggravated the demand for housing.
What makes the urbanization problem particularly acute is that developing
economies of China and India are exhibiting a far steeper rate of urbanization.
Population shift from villages to cities is caused partly due to most economic
development coming from the non-agrarian sector and also because prosperity tends
to displace people.
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Urbanization has twin impact on housing demand. On the one hand, it reduces
the area per household, and on the other, there is an increasing need for more nuclear
families, leading to the formation of more number of households.
2. Nuclearisation:-
Nuclearisation refers to the formation of nuclear families from joint families.
Nuclearisation is primarily driven by employment-related migration and the changing
social structure could also be a factors. This migration is predominantly to urban
areas. Nuclearisation, like urbanization, also has twin impact. It reduces the area per
household, but increases overall household formation, thereby increasing the demand
for housing units. The fact that urban house prices are higher also leads to buying
smaller areas in comparable income categories.
The growing popularity of nuclear families in India has decreased the average
household (HH) size, leading to an increase in the number of households. Graph 3.1
given below shows that the average HH size in India has declined from 5.4 persons
per HH in 1981 to 5.1 persons per HH in 2001.
Graph 3.1:-Decreasing Household Size in India
Average Household Size
Source:- Real Estate Market & Opportunities
In 2001, there were roughly 192 million households in India, about 40 million
more than those in 1991.
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Table 3.6:-Housing Stock, Households and Housing Shortage in India
(Figures in Million)
Indicators 1991 2001
Rural Urban Total Rural Urban Total
(1) Households 111.6 39.7 151.3 138.3 53.6 191.9
(2) Housing Stock 108.5 39.0 147.5 135.1 52.0 187.1
(3) Over-crowding/
Difference between
(1) & (2)
3.1 0.7 3.8 3.2 1.6 4.8
(4) % in housing
shortage
23.1 15.6 21.2 27.6 45.7 31.8
Source:- Census of India (2001), Registrar General of India
The data on households and housing stock for India are presented in the table
3.6 given above. Over-crowding arose due to increase in the number of households
than the number of housing stock. This led to an increase in the demand for housing.
Especially, the incidence of over-crowding has increased manifold in urban areas.
Indeed, the congestion factor can also be worked out by utilizing the data on
household size and the average number of room available to every household by
Monthly Per Capita Expenditure (MPCE). Larger the household size in comparison to
the availability of room, larger will be the congestion factor.
Table 3.7:-Average Household Size and Average No. of Rooms Available in India
Source:- Report of the Technical Group (11th Five year Plan: 2007-12)
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From the table no. 3.7 we can see that the higher is the expenditure class,
lower is the household size and larger is the number of rooms available. This is
understandable as the households in higher expenditure classes tend to have only the
nuclei families while the EWSi and LIG ii families have joint family system. We can
also see that the households in high expenditure class have larger number of rooms
than the couples or even the family members. They have surplus housing at their
disposal. Congestion factor, however, is severe at the lower expenditure classes. In the
EWS and LIG groups a high congestion factor can be inferred from the fact that the
number of family members is much larger than the number of rooms. On the other
hand, the congestion factor is nonexistent for average households in MIGiii and HIGiv
categories, since the number of rooms available, after catering to the married couples
within the household, is larger than the number of other family members.
China also faced the same problem. The table no.3.8 given below shows that
the increase demand for housing in urban areas led to the steep decline in the average
household size; the household size in 2003 was only 86 per cent of what it was in
1990.16
Table 3.8:- Selected Characteristics of Population and Urban Households in
China: 1990-2003
Characteristics 1990 1995 2000 2002 2003
Urban population
(in million)
302 352 459 502 524
% of urban
population
26 29 36 39 41
Urban households
(in million)
86 109 147 165 174
Average
household size
3.50 3.23 3.13 3.04 3.01
Source:- Farhat Yusuf, Ping Zhao, “Patterns of Urban Households in China, 1990-2003”
i EWS- economically weaker section ii LIG-Lower income group iiiMIG-middle income group ivHIG-high income group
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Demand for housing is also influenced by house prices. In the last 2 years,
housing prices have spiraled up in India and China, and would continue to do so as
pressure of population and nuclearisation of families’ increases. The nuclear families
will have no other option except to go for a small household size.
Graph 3.2:-House prices soar in India and China
House prices, 2001=100, local currency
Source:- Real Estate Investments in China and India, Deutsche Bank Research
Average house price growth was 10 per cent in Beijing, 13 per cent in
Shanghai and almost 16 per cent in Mumbai.17 The tremendous growth in house prices
was another reason for the small household size.
3. Affordability:-
The other factor on which the demand for urban housing depends is
affordability. Affordability is mainly composed of the following elements – (a)
increasing income levels and (b) affordable means of financing.
(a) Increasing income levels: -
Housing today is now at one of its most affordable levels in Indian history.
Estimates show that affordability (i.e. the ratio of the price of a residential property to
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the annual income of the borrower) has improved significantly. For instance, for a
typical suburb in Mumbai city, in 1995, it required about 22 times a borrower’s total
annual income to purchase a house, while in 2006, this ratio dropped to 5 times
(HDFC, 2006).18 This increased affordability can also be attributed to the rapid rise in
household earnings over the past decade.
The personal disposable income has grown manifold in the past one decade.
The following table 3.9 gives a clear picture of the disposable income in India from
1999 to 2008.
Table 3.9:- Personal Disposable Income (1999-2008) of India
Years Personal Disposable
Income (Rs. Crore)
Percentage change over the
previous yearv
1999-2000 1,617,965 -
2000-2001 1,773,250 9.6
2001-2002 1,954,839 10.2
2002-2003 2,064,839 5.6
2003-2004 2,282,148 10.5
2004-2005 2,495,015 9.3
2005-2006 2,806,427 12.5
2006-2007 3,182,710 13.4
2007-2008 3,592,172 12.9
Source:- Press Information Bureau, Government of India (30th January, 2009)
The table shows that the personal disposable income has grown two times in
2008 than the income in 2000. Several studies have indicated that salaries in India
have been increasing by an average of 10-15 per cent on a year on- year basis.19 This
has increased the affordability of homes in spite of higher property prices and has
created more demand for housing.
There has been a steady movement of households into higher income
categories. The movement is more pronounced in the high-income categories. Urban
households with incomes above Rs 500,000 are further expected to grow by 12 per
cent in the next 5 years on an increased base. Rural households, in the same income v Percentage change over the previous year= Present year disposable income – previous year disposable income X 100 Previous year disposable income
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class, are expected to grow by 7 per cent.20 (See the Graph no. 3.3 given below). The
twenty Indian citiesvi together account for 10 per cent of India’s population, but
generate 31 per cent of disposable income.21 By 2016, more than half of households
in the twenty cities will be middle class, while the high-incomevii segment could more
than triple. Income distribution has changed dramatically in certain cities. Surat's
middle class has more than doubled between 2004-5 and 2007-8, while the low-
income category has shrunk by over a third. The high income category has expanded
the fastest in Lucknow, Jaipur and Nagpur.22 Household income levels for Mumbai
and Delhi (as well as Chandigarh and Surat) in 2007-8 have crossed the Rs. 4 lakh
mark. This makes income per capita in Mumbai and Delhi well over double estimates
for all-India GDP per capita, and roughly equivalent to China’s 2007 per capita
income levels.23
Graph 3.3:- Increase in Income in Urban and Rural Areas In India
Increase in Income Urban and Rural 2002-2006 Increase in Income Urban and Rural 2007-2011
Source:- CRISIL Research < 2 Lacs 2-5 Lacs > 5 Lacs
vi Twenty cities of India are Amritsar, Chandigarh, Jalandhar, Ludhiana, Delhi, Faridabad, Jaipur, Lucknow, Kanpur, Ahmedabad, Bhopal, Pune, Nagpur, Surat, Mumbai, Kolkata, Hyderabad, Bangalore, Chennai, Coimbatore vi Low-income class= incomes below USD 975 per annum a growing middle class= incomes between USD 975 and 4,675 per annum and a small, affluent/rich class= incomes above USD 4,675 per annum (according to UNITED NATIONS HUMAN SETTLEMENTS PROGRAMME) vii low-income class= incomes below USD 975 per annum a growing middle class= incomes between USD 975 and 4,675 per annum and a small, affluent/rich class= incomes above USD 4,675 per annum (according to UNITED NATIONS HUMAN SETTLEMENTS PROGRAMME)
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In China also income growth has been strong in the last ten years. Underlining
increased affordability. Since 1996, average annual income growth has been strongest
in the principal cities Beijing (11 per cent) and Shanghai (10 per cent).24 The table
3.10 given below shows that the growth of per capita annual disposable income of
urban household has increased to 14.5 per cent in 2008 from 7.9 per cent in 1999.
Table 3.10:-Per Capita Annual Disposable Income of Urban
Household in China (Y)viii
Year Per Capita Annual
Disposable Income of
Urban Household (Y)
Percentage growth
1999 5,854.0 7.9
2000 6,280.0 7.3
2001 6,859.6 9.2
2002 7,702.8 12.3
2003 8,472.2 10.0
2004 9,421.6 11.2
2005 10,493.0 11.4
2006 11,759.5 12.1
2007 13,785.8 17.2
2008 15,781.0 14.5
Source:- China Statistical Yearbook 2008
The continued economic progress in China has increased household incomes
and boosted housing demand in the long run. The ratio of urban personal annual
income per capita relative to the average selling price of residential properties, in
terms of Chinese yuan per square meter, rose to 3.9 in 2007 from 3.6 in 2004,
indicating that a family is more likely to be able to afford the same property than three
years ago.25 The ratio of GDP per capita to house prices also stepped up steadily
during the same period.
viii 1 CNY = 7.12 INR this is the current exchange.
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Graph 3.4:- Ratio of income per capita to house price in China
Source:- China Statistical Yearbook, Hang Seng Bank
Naturally as income levels increase and more people move into the next higher
class, they will have more disposable income. From Graph 3.5 we can see that in 2005
the urban populations of India and China were predominantly from lower income
groups. China in particular has a much higher proportion of households living on
poor/deprived levels of income. By 2025 these will have largely been supplanted by
upper-aspirant/seeker households who will account for over half the urban population.
Graph 3.5:-Distribution of Urban Households by Income Group in
China and India
Source: -Mckinsey Global Institute Analysis (2006, 2007)
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In China the top two income groups are expected to account for less than 10
per cent of the urban population in 2025, in India they will be nearly a third.26 By
2025 while China may have a much larger urban middle class than India overall, the
later could have more highly affluent households, both in absolute and relative
terms.ix This is all due to large scale migration from rural to urban areas coupled with
urban incomes growing more rapidly than the economy as a whole. This rapid rise in
household earnings has increased affordability over the past decade.
(b) Affordable means of financing:-
Besides rising incomes other factors that have increased home affordability
are: easier access to mortgage finance, longer loan tenures, higher loan-to-value ratios
and tax incentives. Though home loan rates have increased by almost 200 basis
pointsx in the past two years they are still 45 per cent cheaper than what they were in
March 2001. Tax savings on interest payments and principal repayments per annum
on mortgage loans have also made home purchases more attractive.27
The boom that we have seen recently in the property market in India has been
much helped by the banking industry. Residential property is one of the costly assets
which an ordinary man cannot afford to buy in cash. People buying apartments
directly with cash can hardly be seen. Most of the home buyers around the world like
to purchase homes only with bank’s financial scheme. There is an uprising in the
residential properties in all the metropolitan cities in India. During 1999-2002, two
landmark events happened. First, home loan rates started declining. This not only
reduced the interest outgo but also the EMIs (Equated Monthly Installments), allowing
people to go for larger and better homes. In order to increase the affordability, the
government has offered tax incentives to individuals who opted for home loans.
The recent thrust given by the Government to the housing and housing finance
sector and various concessions offered by the government to the people have had the
desired effect. The demand for housing has picked up. This is evident from fact that
total home loan disbursement by Banks and Housing Finance Companies has risen from
ix In terms of the highest income group, Merrill Lynch, Cap Gemini (2007) estimated that there were 100,000 High Net Worth Individuals (HNWI) in India to 345,000 in China, but that this group has been growing more rapidly in India than in China. x basis points: - A basis point is the smallest measure used in quoting yields on fixed income products. The important thing to understand is that one basis point is equal to one one-hundredth of one Percentage point (0.01%). Therefore, 100 basis points would be equivalent to one full per cent.
75
Rs. 29359.29 crore in 2001-02 to Rs. 51672.7 crore in 2002-03 witnessing a
phenomenal growth of 76 per cent during this period.28 Table 3.11 gives a clear picture
of home loan disbursement in India from 1999-03.
Table 3.11:- Home Loan Disbursement in India (in Rs. Crore )
Source: - National Housing Bank
The impact that lower interest rates have had on home loan disbursement can be
seen from the graph no. 3.6 given below:
Graph 3.6:- Home Loan Disbursement vs Interest Rates in India
Source: -Survey On the Indian Housing Finance Sector
With the introduction of floating rate loansxi in 1999-2000, loans of 20 and 30
years tenure and the entry of new, aggressive players such as ICICI Bank, Standard
xi Floating rate loans- Type of loan whose interest rate (and, therefore, monthly installment amount) fluctuates according to the rise or fall in the market interest rates.
76
Chartered and HSBC, getting home loans became easier.29 All this brought in a new
paradigm of affordability in housing. The single-most important factor that helped
people to buy a house was the availability of mortgage at attractive interest rates.
Despite the intense pace of growth in housing finance over the past five years
in India, mortgage penetration as a percentage of GDP remains low, at four per cent.
This is extremely low indeed compared with countries such as the USA and the UK,
where the combined value of mortgages passes 60 per cent of GDP. Even when
compared with other Asian countries, India’s performance is weak. (See table 3.12
given below). This is further corroborated by the fact that despite the recent,
impressive rate of growth in the housing finance sector, financing through the
organised/formal sector continues to account for only 25 per cent of total capital
expenditure in housing in India.30
Table 3.12:- A Cross-Country Comparison of Mortgages to GDP Ratios
Country Mortgages to GDP Ratio (%)
India 4
China 11
Korea 14
Malaysia 22
Hong Kong 50
Germany 52
USA 64
UK 72
Source:- European Mortgage Federation, HDFC, 2006
There is a preference amongst the majority of Indian households to own a
home rather than opt for renting. The tendency to own a house has shown an increasing
trend among the urban households. The table 3.13 given below shows the tenure status
in the urban area.
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Table 3.13:- Tenure status in Urban Area in India
Years Owned (%) Rented (%)
1961 46.2 53.8
1971 47.1 52.9
1981 53.5 46.5
1991 65.9 34.1
2001 71.5 28.5
Source:- Census of India
From the table 3.13 we can see that percentage of houses owned by the urban
households has increased to 71.5 in 2001 from 46.2 in 1961. On the other hand there is
a decline in urban household residing in rented houses from 53.8 per cent in 1961 to
28.5 per cent in 2001. It shows a drastic change in the tenure status in urban areas in the
last four decades. In urban areas, the trend has distinctly changed as more people have
gradually begun to opt for ownership as against rental housing. The reasons are two-
fold: first, rent-control laws in urban areas have discouraged new rent-based units
from coming into the market. Secondly, an increase in available housing finance
options over the years has enabled more people to buy a home. This has affected the
demand for housing.
Today home loans are more affordable and available at better terms. Housing
finance companies and banks are introducing various schemes to attract the borrowers.
Indian home loan market has witnessed a distinct shift in the age profile of borrowers.
Few years back, a large number of borrowers used to be in their late 30s and 40s but
today greater number of borrowers is in their mid 30s. Another factor which has
affected the affordability is the higher loan to the cost ratio. Borrowers can today raise
up to 100 per cent or in some cases even 110 per cent also (in which case lenders
provide financial assistance for the complete property value, stamp duty, registration
and additional 10 per cent as personal loan) of their borrowing requirements from the
lenders.31 Easy availability of finance has increased home affordability.
The definition of housing affordability by the shelter poverty measure, uses a
sliding scale to reflect that upper income group and small households can afford to
spend much more than 30 per cent of their incomes on housing and still have enough
78
income left over to satisfy other basic needs, whereas for extremely low income
households to pay even 10 per cent of their incomes on housing costs may be forced
to forgo essential medical care and healthy food.32 In China, the desire to own
property is very strong among the populace and they are likely to set aside a
substantial amount of their income, as high as 50 per cent, to pay for the mortgage
repayment. While promoting urban economic reform in 1980 Deng Xiaoping said,
“Urban residents should be able to buy or build their own housing units....Rents must
be adjusted...so that people will see the benefit of buying housing. When rent is
increased, subsidies should be given....Housing construction...by private entities
should be allowed."33
Chinese housing policies underwent a series of changes in the 1990s. But the
most interesting one happened in 1998, according to the policy, the practice of
providing houses by State Owned Enterprises is stopped and government began to
encourage workers to buy their own homes. Since the land is nationalised, home
purchasers could hold legal rights to occupy the building for a specific period
(typically the tenure for residential property is 70 years; commercial building 30-50
years; and industrial property, 20 years) and could transfer the title to another party.34
People’s Bank of China issued the guidelines to others banks in the country on
granting housing loans. The new policies speeded up the privatization of residential
housing and led to the full-scale development of the primary mortgage market. By the
end of 2005, the majority of the residential units were traded at market prices, and the
subsidized segment accounted for less than 10 per cent of the private housing market.
Table 3.14:- Year to Year Growth of Real Estate Loans and
Investments in China
1999 2000 2001 2002 2003 2004
Growth of real estate
loans (%)
39 117 35 42 37 23
Growth of real estate
investment (%)
14 19 27 24 30 28
Source:- Chang Jian Sheng, 2005
It is evident from the above table 3.14 that the growth of real estate loans and
investments are in an increasing trend though the year 2000 witnessed a huge hike
79
comparing to 1999 in terms of loans. Commercial banks are currently the dominant
lender in the primary mortgage market, supplemented by the Housing Provident Fund
(HPF) scheme established in 1990. The Housing Provident Fund (HPF) scheme
requires compulsory saving by employees (plus contributions from employers) for
entitlement to a housing loan in the future. Currently, HPF loans represent
approximately 12 per cent of total mortgage balances outstanding. This scheme has
played a more significant role in the demand for affordable housing. Shanghai was the
first Chinese city to implement the HPF scheme as a financial measure of the housing
reform. The HPF was proposed by the Shanghai government in 1991. In 1994, other
cities in China have adopted a similar policy. The savings belong to employees and
should only be used for home purchase, self-building, and renovation of employees’
housing units.
Table 3.15:- National Housing Provident Fund contribution and usage in China
2000* 2003 2004 2005
Number of account holders (10000) 6300.0 6317.7 6138.5 6329.7
Cumulative contribution (CNY bn) 216.9 565.5 740.0 976.0
Cumulative contribution per holder (CNY)
3442.5 8951.1 12055.5 15418.6
Contribution in year (CNY bn) NA NA 183.7 235.9
Contribution in year per holder NA NA 2993.2 3727.2
Total account balance (CNY bn) NA 377.8 489.4 626.0
Account balance per holder NA 6677.8 7972.7 9889.1
Cumulative withdrawal (CNY bn) NA NA 250.6 350.0
Withdrawal in year (CNY bn) 17.4 NA 73.1 99.3
Cumulative HPF mortgage extended (CNY bn)
78.5 234.4 340.7 459.9
Cumulative number of mortgages extended (10000)
NA NA 425.5 523.5
Mortgage extended in year (CNY bn) NA NA 94.3 119.5
Average size of new mortgage (CNY) NA NA NA 121969.4
Note: NA: not available. *--The number of account holders for 2000 is assumed to be 63.0 million. Source:- Compiled from Ministry of Construction (2004 and 2006), “Financing Home Purchase in China” Housing Studies, Vol. 22, No. 3, 409–425, May 2007
80
From Table 3.15 it can be seen that at the end of 2005, a total of 63.3 million
workers had joined the HPF. However, this represents only slightly more than half of
the total urban workforce. In fact, the number of HPF account holders stayed at
almost the same level between 2003 and 2005, even though the scheme was extended
to include all workers in urban areas. The HPF has experienced quite phenomenal
growth in recent years. Cumulative contributions increased more than three-fold
between 2000 and 2005, from CNY 216.9 billion Yuan to CNY 976.0 billion Yuan.
Only in the past few years was a substantial increase seen in the size of the annual and
cumulative contribution. In 2005, the annual contribution reached CNY 235.9 billion
Yuan. In 2000, for the nation as a whole only CNY 17.4 billion Yuan was drawn from
the HPF accounts to help finance home purchase. In 2005, the amount withdrawn
increased to CNY 99.3 billion Yuan. At the end of 2005, the cumulative amount of
withdrawal stood at CNY 350.0 billion Yuan, which is equal to 35.9 per centxii of
cumulative contribution.
In addition to its savings function, the HPF also acts as a home financier.
Again, its role as a mortgage lender was quite small before 2000. At the end of that
year the cumulative amount of HPF mortgage loan granted stood at only CNY 78.5
billion Yuan, but more recently, more HPF contributors are making use of HPF loans.
The cumulative amount of loan extended increased more than five-fold to CNY 459.9
billion Yuan by the end of 2005, and the cumulative number of receivers of HPF
mortgage loans reached 5.23 million. In 2005, some 1 million purchases or
approximately 20 per cent of all housing transactions were financed by HPF loans.
The average loan amount stood at CNY 121,969 Yuan.
Since the end of welfare-oriented urban home distribution system in the late of
1990s, China’s home mortgage business has witnessed a tremendous growth and
currently it is playing as the most important funding resource for urban residents’
home purchase.
xii 35.9 per cent=( Cumulative withdrawal÷ Cumulative contribution )×100 i.e. (350÷976)×100
81
Table 3.16:- National growth in mortgage loans to individuals in
China, (1997–2004)
Year
Mortgage loan
extended in the year
(CNY billion)
Mortgage loan
balance (CNY
billion)
Mortgage loan
balance as percentage
of GDP (%)
Mortgage loan extended as
percentage of total bank
loan extended in
the year (%)
Mortgage loan
balance as percentage
of total bank
loan balance (%)
1997 NA 19 0.26 NA 0.25
1998 29.5 48.5 0.62 2.54 0.56
1999 84.6 133.1 1.62 11.73 1.42
2000 202.2 335.3 3.75 35.87 3.37
2001 223.4 558.7 5.74 17.26 4.97
2002 267.1 825.8 7.85 14.07 6.29
2003 352.8 1178 10.05 12.74 7.41
2004 422 1600 11.72 22.97 9.02
Note: NA: not available. Source:- China Statistical Yearbook (NBSC, various years), Almanac of China’s Finance and Banking 2004, p. 602 and p. 623. Mortgage loan balance data for 1998 and 2004 were given in http://www.adb.org/ PRCM/speech-pres/moc-hou.pdf.
Table 3.16 provides information on the growth in personal mortgage loans by
commercial banks during the period 1997–2004. It can be seen that prior to the
housing reform of 1998 the mortgage loan business was very small, but it has since
experienced phenomenal growth. Mortgage loans’ share of total bank loans
outstanding was 0.25 per cent in 1997, but the figure reached 9.02 per cent in 2004. In
absolute terms, total mortgage loans outstanding increased 84 fold, from CNY 19
billion Yuan in 1997 to CNY 1600 billion Yuan in 2004. The amount of annual new
mortgage loans extended also increased from CNY 29.5 billion Yuan in 1998 to CNY
422.0 billion Yuan in 2004.
The home mortgage loan of China has developed rapidly since 1999, and
attracted more and more attention due to its diversified risk and low default rate. Up
to the end of 2008, the home-mortgage balance of commercial banks had reached
29.83 trillion, and its share in the total loan balance rose to 9.97 per cent from 1.42
82
per cent (year 1999-Table 17).36 By lowering loan rates and extending payment
deadlines, the citizen in China were encouraged to purchase houses with loans. In
Asian countries, especially in India and China, the introduction of home loans and
floating rates have become more popular among borrowers as they are of the opinion
that they could enjoy lower short-term rate which is comparatively less than long term
fixed rate. China is trying to commercialize the housing sector and boost housing
sales by setting up housing-related banks, funds, loans and mortgages.
According to the China Economic Quarterly (CEQ), about 80 per cent of
urban Chinese households own their homes and only half of urban owners have taken
out a mortgage. This is because 50-60 per cent of Chinese homeowners are estimated
to have bought their homes during the privatisation period.37 At that time, buyers paid
prices that were below the market value, and few required mortgage finance.
Graph 3.7: Housing type and tenure, China
Source:- Asia Housing Review, August 2008
As shown in graph 3.7, the vast majority of people live in homes they have
built themselves. In Beijing, the single most dominant form of housing is that bought
during the privatization process, accounting for 28 per cent of all households. By
comparison, in Shanghai, privately purchased accommodation represents the largest
83
share of housing types, at 24 per cent of all households.38 Housing demand in the
principal cities of Beijing and Shanghai is driven by an expanding population and
rising incomes, which have been fuelled by economic growth.
Conclusion:-
The major factors that are driving the housing demand in India and China are
the growth of population and rising urbanization, the growing number of nuclear
families size and increasing affordability. The accelerated pace of urbanization
without proportionate growth in industrialization and the rise in the level of overall
economic development has brought a number of problems in the urban centers of the
developing countries. The most important of these are inadequate urban infrastructure
and housing, deteriorating urban environment, urban unemployment, congestion, slum
proliferation, rising disparity in incomes, etc. Resultantly the urban centers in both
China and India are facing the impacts of housing shortages such as increased sharing
of dwellings by two or more families, increased squatting on public and private land
and outright homelessness, etc.
Rise in disposable income of the Chinese and Indian middle income groups
has created a dramatic effect on the demand for housing across both the countries.
However, the demand is expected to outstrip the supply of housing. One would expect
this as with increased availability of finances has caused price of housing to increase
which itself would result from constraints in housing supply.
84
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