WHY INDIA HAS SLUMS?

CAN WE
DO SOMETHING ABOUT IT
– the solution is not affordability but somewhere else

D Joel K Pandian
 Why India has More Slums? Can We do Something about It

Why India has More Slums? Can We do Something about It

Changes in the national economies, liberalization of markets, growing population and urbanization rates have
changed the dynamics of the housing sectors in many developing countries. Housing sectors in India, China and
Vietnam have been liberalized and restructured, in part due changes in the economy and in part to attract
investments from foreign developers.
The Indian housing sector has experienced the repealing of some restrictive land laws, rising income and falling
interest rates a huge demand due to fast urbanization. In China and Vietnam, changes in housing provision from
state to private led and increasing investment by foreigners has increased demand for housing.

These changes have created opportunities for the participation of foreign developers in these markets. These
opportunities arise from the need of local developers to develop townships and developments that are world class
and also partly to learn from technical expertise and development know-how possessed by these foreign
developers. Foreign developers from Hong Kong, Singapore, Malaysia and Indonesia have been active in
internationalizing into these three countries.

Housing Sale and Rental in Asian Markets

Asia is home to the largest and fastest growing countries in the world, both in terms of population and economic
size. With its current size and anticipated rapid economic transformation and growth, the highest rural-to-urban
shift is expected to occur in Asia.

As the population and urbanization increases, demand for housing for owner-occupancy and rental increases.
Resources already devoted to housing become strained due to limited supply of land in cities. The inadequate
supply of housing in the region can be seen in the high house-price-to income ratios (Table – 1) and high share of
slum dwellers (Fig-1) in the urban population.

A decent 35 sq. m. condominium unit in the city centre costs around six to thirty times the annual average income.
Table 2 below shows that there are serious affordability issues in Asian cities, especially in Seoul, Manila, Jakarta
and Shanghai.

TABLE 1 AFFORDABILITY OF HOUSES IN SELECT CITIES OF ASIA1

City Per capita Income Condominium Price Condominium Price to Income

(US$) per Sq. Meter Prices (US$) Ratio3
(US$)2

Kuala Lumpur 6,991 1,222 42,770 6.1

Tokyo 45,425 8,000 280,000 6.2

Singapore 28,578 6,700 234,500 8.2

1 Source: Global Property Guide

2 Assuming a 35 sq. meter condominium price
3 Higher the price to income ration lower the affordability

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 Why India has More Slums? Can We do Something about It

Bangkok 6,317 1,667 58,345 9.2

Seoul 10,305 3,300 115,500 11.2

Manila 2,217 1,300 45,500 20.5

Jakarta 1,861 1,250 43,750 23.5

Shanghai 2,474 2,200 77,000 31.1

New Delhi4 735 1,973 69,066 93.9

Mumbai5 735 10,110 353,850 481.42

From the above table it can be seen that the price to income ratio is very high in Asia and is highest in the
emerging economies of Asia such as India, China, Thailand and Indonesia. This is a clear sign of overheating in the
market due to the very high and sudden demand for housing units in these countries. This is the direct fallout of the
fast urbanization in these markets.

About a third of Asia's urban population lives in slums, a ratio tthat

hat is higher than other middle-income
middle countries in
Latin America and the Middle East. In Southeast Asia, one out of every four urban residents lives in slums.

Countries with serious slum problems include Indonesia (with 21 million slum dwellers), Philippines (20 million), South
Korea (14 million), India (240 million) and China (178 million) [UN Habitat 2003]. These are the same countries
that have serious housing affordability conditions.

44.1
45
40 37

35
29 28
30 25.4
22 23.1
25
20
15
10
5
0
East Asia South East Indonesia South China Philippines India
excl. China Asia excl Korea
Indian

FIGURE 1 PERCENTAGE SLUM DWELLERSS TO THE URBAN POPUL

POPULATION

4 Cannaught Place, Jor Bagh, Glof Links,

inks, Greater Kailash average values
values-Global Property Guide
5 Nepeansea Road, Malabar Hill, Cuffe Parade, Altamount Road, Breach Candy, Nariman Point average values

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 Why India has More Slums? Can We do Something about It

There are many reasons to the high percentage of urban population living in the slums. But the main reason behind
this can be attributed to the price to income i.e. the affordability criteria. The other reasons being many of the
developing
eveloping countries in Asia do not provide sufficient protection of property rights. Poor governance and weak
control of corruption are also observed in China, Indonesia and the Philippines.

In the Philippines, only 10 million of the estimated 25 million (40%) parcels were registered. Further, at the current
rate of property titling in the Philippines, it is estimated that it will take 75 years before complete titling coverage
is achieved.

In China, the influx of foreign investment in the real estate industry has led to illegal land grabbing in rural areas.
The Ministry of Land and Resources recently reported that about to 60 to 90% of land acquisitions are illegal [BBC
2006].

The Philippines and India top the countries that have the most number of procedures involved in registering
property, followed by Indonesia and South Korea.

Transaction Cost in Asia

The sale and purchase of property involve many costs: registration costs
costs,, real estate agent fees, legal fees, and
sales and transfer taxes. Registration costs include stamp duties, deed taxes and notary fees. In most countries in
Asia registration costs are low.

Countries with less transparent markets and more registration pr

procedures
ocedures have higher estate agent fees,
particularly the India, Philippines and Indonesia.

To analyze the transaction costs more clearly, a hypothetical case is adopted where a resident citizen of the
country purchases a property that is worth ten times tthe
he country's gross national income per capita. To make the
case as simple as possible, the property is paid in cash. The unit is a condominium located in a major city. The
property was used by the seller as his principal residence for the past ten years.

Vietnam
Thailand
Taiwan
Srilanka
South Korea
Deed Tax
Singapore
Transfer Fee
Philipines
Malaysia Stamp duty
Indonesia Legal Fee
India
China
Hong Kong

0% 5% 10% 15% 20% 25% 30%

FIGURE 2 TRANSACTION COST IN ASIA

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 Why India has More Slums? Can We do Something about It

As may be seen from Figure 2 and Figure 1, the countries with high transactions cost has high slum dwellers
and when seen from table 1, the countries with high slum dwellers have low affordability for housing. Hence, it
may be concluded that apart from many other factors the government tax and the transparency in the
markets affect the affordability for houses in the middle income countries and particularly in Asia.

A Bottom of the Pyramid Approach…

Housing is the biggest Bottom of Pyramid (BOP) market, a market which is larger than transportation and a
bit smaller than energy. The market encompasses major spending items—rent, mortgage payments (or
imputed rents), and repairs and other services. But the BOP housing market is perhaps uniquely handicapped
by informality. This is true in Asia especially, where mortgage markets are undeveloped and land prices high
relative to income, the market potential and the need is huge.

How large is the Market

The measured BOP market for housing in Africa (12 countries), Asia (9), Eastern Europe (6), and Latin America
and the Caribbean (9) is $331.8 billion. The total BOP housing market in Asia (including the Middle East) is
estimated to be $171.4 billion, representing the spending of 2.9 billion people. In Asia one extreme is
represented by Sri Lanka, Pakistan, and Bangladesh, where the BOP accounts for more than 90% of the
spending on housing—the other by Thailand and India, where despite the substantial BOP population, the
recorded share is only 47% and 48%, respectively. This explains the reason why the demand of 22 million
housing demand is keep increasing as a major portion of the same is low income group housing requirements.
The major challenge in India and Thailand is to develop low income group houses but the developers are as
of now focusing on high and middle income group houses.
In Asia, India has the largest measured BOP housing market at $62.1 billion; BOP spending accounts for 48%
of the national housing market and averages $164 per household a year. With all the huge spending by the
low income group on housing the demand is still increasing and the affordability of the BOP segment is falling.
The main reasons for the same are as below
1. High transaction cost of housing and land units in Asia and in particular India.
2. Unclear land titles
3. High interest rates for the Low Income Group due to the high risk rating given to such population
4. Outdated Land laws
Recommendations

1. Reduce or abolish excessive taxation of property transactions.

2. Harness cooperatives and micro financing institutions to promote cooperative-based rental housing
units.
3. Increase the Transparency in housing transaction Market
4. Establish a one-stop shop for property purchase registration and tax payment.

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