The real estate sector in India caters to the diverse housing needs of the population. An emerging trend is the rising demand for luxury homes owing to the rise in disposable income and evolving lifestyle needs of people. However, it is the affordable segment that promises to fulfil the homeownership dreams for a majority of Indians. With the property market becoming saturated and prices skyrocketing in the metropolitan cities, affordable housing has seen a shift from big cities to smaller towns in India. These new locations come under the category of Tier 2 and Tier 3 cities. Some of them are satellite towns and peripheral areas around big cities. The demand for real estate in these areas has seen a significant increase in recent years. In this article, we will explore the key real estate and affordable housing trends in these cities.
Tier-2 vs Tier-3 cities: The rising demand for affordable homes
The cities are classified into tier-1, tier-2, and tier-3 cities based on their population size and other factors, such as infrastructure, industrial growth, and affordability. Unlike metro cities, tier 2 and tier 3 cities are emerging locations with a developing economy. Compared to the top cities, the cost of doing business per square foot is significantly lower in Tier 2 and Tier 3 cities. Moreover, quality housing is available at affordable rates, which becomes a key driving factor for the real estate sector in these cities.
When comparing tier-2 and tier-3 cities, the former sees a higher economic growth and development of commercial and industrial hubs as these cities attract a lot of investments. This creates higher employment opportunities and demand for homes due to the influx of working professionals from other cities. On the other hand, the economic activities in tier-3 cities are mainly driven by local and small-scale businesses. Additionally, social infrastructure facilities, including colleges and medical facilities, are relatively better in tier 2 cities compared to tier 3 cities.
Key factors driving the growth of affordable housing in these cities
- Urban expansion: The rapid urbanisation driven by population growth and migration of people in search of a better quality of life has led to the expansion of cities and the emergence of new real estate hubs in surrounding regions.
- Lower land prices and construction costs: Compared to big cities, where land availability is limited, smaller cities have lower land prices, making them more attractive for affordable housing developments. Moreover, the costs of sourcing and transporting construction materials locally contribute to the affordability factor.
- Development of infrastructure: There are several major infrastructure projects, such as the Delhi-Mumbai expressway, which pass through smaller cities, enabling seamless connectivity. Moreover, upcoming airports and metro projects are fueling the demand for real estate in the surrounding regions.
- Growth of employment opportunities: Some popular tier-2 cities, such as Jaipur, Lucknow, and Kochi, have attracted numerous start-ups and large companies. The growth of IT hubs and other industries has attracted numerous working professionals, resulting in increased demand for housing.
- Evolving lifestyle needs: The growth of nuclear families and changing preferences among people have fueled the demand for housing in India. Many people have started to realise the relevance of home ownership, driven by factors such as family aspirations, rising rental costs, and inflation.
- Opportunities for rental income: Due to growing housing demand, several investors are turning to smaller cities for investment, aiming to generate attractive rental income.
- Higher returns on investment (ROI) due to rising demand: With fast-developing investment and economic growth, investing in properties in these cities assures higher ROI for these investors.
Government’s push for affordable housing
What makes the goal of home ownership realistic for people, especially those from lower-income groups and economically weaker sections (EWS), is the government’s commitment to its affordable housing objectives. The government has come up with various schemes to make housing accessible for a majority of Indians. The Pradhan Mantri Awas Yojana (PMAY) – Urban and Rural is a major initiative that will enable millions of home seekers to avail credit through subsidies and incentives.
The PMAY 2.0 ‘Housing for All’ aims to offer financial assistance to one crore urban poor and middle-class families to build, purchase or rent a home at an affordable cost in cities. Furthermore, the Credit Linked Subsidy Scheme (CLSS) is a component of the PMAY scheme that provides a subsidy on the interest component of home loans, thereby lowering the home purchase costs for buyers.
In addition to these initiatives, the government has invested in developing urban infrastructure through metro projects and smart city initiatives. Besides, policy reforms such as the Real Estate Regulatory Act (RERA), simplified taxation through GST, and the Digital India mission have contributed to the formalisation of the economy. This would contribute to an increased borrower base and reduced credit risk for lenders, thereby improving the possibility of affordable housing finance.
Key challenges in affordable housing in smaller cities
- Title and land acquisition issues: Legal issues related to title disputes and land acquisition are common in smaller cities, often due to factors such as informal settlements. The digitalisation of land records aims to reduce these issues. However, there is a need to implement these systems in smaller towns and cities.
- Lack of quality infrastructural facilities: Infrastructure is developing at a faster pace in tier 2 cities compared to tier 3 cities. This could pose issues for those planning to purchase a house for end-use.
- Financial challenges for developers and buyers: The limited access to affordable financing for developers and homebuyers is one of the major hurdles. Lack of sufficient financial resources for large-scale projects often results in project delays or other limitations.
- Regulatory hurdles: The complicated and lengthy approval processes, along with bureaucratic delays, increase the project’s cost and completion time.
Housing.com News Viewpoint
Affordable housing could be the right choice for you if you are a first-time homebuyer. The market is expected to see a steady demand for budget-friendly homes in the coming years, offering ample investment options for buyers. Buying an affordable home in smaller cities can be advantageous for you because the prices are likely to appreciate over time due to rapid urbanisation and infrastructure development. Moreover, support from the government through various schemes and tax benefits ensures minimum risk and maximum returns.
FAQs
What is called affordable housing in tier 2/3 cities?
Affordable housing refers to homes that fall within the budget of families with incomes below the median income levels. In smaller cities, affordable homes come within prices ranging from Rs 15 lakh to Rs 45 lakh.
How can first-time homebuyers in small cities avail of affordable housing benefits?
Eligible beneficiaries under the Credit Linked Subsidy Scheme (CLSS) of PMAY are allowed to get subsidies on home loans. Moreover, there are state-specific schemes such as the MHADA lottery, DDA Housing Scheme and Tamil Nadu Housing Board Schemes that cater to buyers from different segments.
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