Affordable housing takes root in small-town India

Edged out of premiumised metro markets, affordable housing has become the norm in smaller cities across India. New norms of pooled family income have made formal finance available to small-town borrowers as well

Affordable housing has shifted to small-town India. A typical borrower would come from a low-income group segment with a family's disposable income in hand. This Economically Weaker Segment (EWS) low-income buyer would invariably be a first-time home buyer and borrowing from a formal system for the first time. While this category has shrunk to a mere 16% of formal lending by banks, they constitute about 90% of small housing finance institutions (HFIs) and have grown at a CAGR of 35-40% in the past five years or so.

This small-town growth follows a careful plan in Budget 2025 announcements. It left money in the wallets of the middle class, called out incentives for setting up global centres for excellence (GCCs) in Tier 2 cities, pushed for a National Geospatial Mission to aid planning, SWAMIH 2 to complete stuck projects, and a Challenge Fund of Rs 1 lakh-crore for creation of growth hubs in small cities. Decode all this to create jobs in small cities. It’s another fact that these plans are still on the drawing boards.

However, even as pushing growth and jobs to smaller cities in a planned fashion is slow, the demand for affordable housing has taken off. There has been endless demand at the base of the pyramid. The top eight cities — Delhi, Mumbai, Bengaluru, Chennai, Kolkata, Hyderabad, Pune, and Ahmedabad — and their influence areas, catered to the post-Covid 19 flurry of demand for luxury and premium housing, with all categories of developers rushing to meet this demand. Edged out of the big cities, where the affordable supply fell from a healthy 40% in 2019 to 16% by 2025 the low-cost segment moved back home. The gig economy ensured jobs for many more, and they too aspired to ownership and a surplus to be invested.

The affordable housing finance statistics below are drawn from an interview this author had with Kalpesh Dave, the CEO of a Mumbai-based housing finance company.

Edged out of the big cities, this category moved back to the safety of the home turf, in small towns, aspiring to become big. The phenomenal growth of road networks shrank the accessibility problems and made them good enough to attract investment from their city dwellers. Houses were self-engineered and constructed in the G+2 (ground plus two floors) format that has evolved locally. This formal housing would typically be about 20-25 units in G+2 format, constructed on a single piece of land by local entrepreneurs. But the houses were constructed with formally borrowed money from low-cost housing finance institutions.

The average borrowing for self-construction would typically be Rs 10 lakh or less, and about Rs 12-15 lakh to buy in affordable housing projects in Tier 2 and Tier 3 towns, which have become available after the pandemic. The locations would be Tier 2 and 3 cities and semi-urban locations. Extended metros and mini-metro locations see this demand. The same borrowing in rural locations would be sub-Rs 5 lakh and in the ambit of microfinance. In developer-led housing, disbursements would be according to progress in construction.

In the hinterland, they access finance from small HFIs and have demonstrated a robust repayment record. But as returnees, they have taken the contours of city lifestyles including nuclerisation of families. Digitisation and the availability of the Internet everywhere help too. As this demand cements, more formal lending has taken place, and developers, too, want to build. Supply-side dynamics are now trying to catch up.

About two-thirds of the current demand is for upgrading and self-construction. About a third is for buying constructed houses. Home improvement extension finance and reconstruction both dominate with ticket sizes of Rs 13-15 lakh.

A unique feature here is that the lending is to families and not necessarily the individuals. The income is a blend of formal and informal, including agriculture, small shops and jobs for the children in a Tier 2 or 3 town. Women manage cattle or a shop, or a tailoring business. As this is their first entry into formal credit and aspirational asset class owner status, repayment of 15-year loans normally takes place in seven years or so. They borrow at fixed rates as the dynamics of floating rates are too difficult to understand. They also normally do not default on EMIs.

For income proof, documentation is required from all earning members who intend to contribute, including salary slips, bank statements for the last 6-12 months, Form 16, or IT returns. For informal income, GST returns, cash receipts, business ledgers, or income affidavits with bank validation, are all accepted.

The loan is formally sanctioned in the name of one primary borrower (typically the titleholder or highest earner), who bears legal repayment responsibility. However, other earning family members can and are added as co-applicants. Their incomes strengthen eligibility, and they share a moral liability for repayment. Repayments are typically made through the primary borrower's account, funded by pooled family resources.

Ultimately, distributed development is taking home ownership across India, largely following the growing transport network. It takes back city aspirations to small-town India and creates a growing class of pooled asset owners.

(E Jayashree Kurup is a writer-researcher on real estate and city governance. She is Director, Real Estate & Cities, Wordmeister Editorial Services. The views expressed are her own.)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.