Affordable housing: The residential sector reeling under big challenges in 2023

Affordable housing: The residential sector reeling under big challenges in 2023

For years, affordable housing has been a critical issue in the residential sector worldwide, and the trend has further continued in 2023. Global, government institutions are witnessing a significant drop in the availability of affordable units. Several factors have contributed to the demand and supply gap.

The need for improved living conditions and rising construction costs has led an increasing number of developers to move towards high-priced units worldwide. This has resulted in a significant drawdown in the number of new project launches in the segment, especially in countries like India, over the last few years. However, according to ConsTrack360’s, construction industry in India is expected to grow by 12.0% to reach INR 45,907 billion in 2023. The growth momentum is expected to continue over the forecast period, recording a CAGR of 9.9% during 2023-2027.

The disposable income of the middle-class family has been on the rise in India. Furthermore, as the majority of Indians buy a home once in their lifetime, they are looking for better options. This is often not the case with the affordable housing project.

  • This increase in construction material costs has made it difficult for developers to construct affordable housing units that meet the quality standards required by home seekers. The demand for improved living conditions means that buyers are expecting better amenities. The lack of amenities often makes affordable housing less desirable, leading to a reduction in demand for these units.

The trend is projected to further continue from the short to medium-term perspective, as the disposable income of the middle-class group continues to grow in India and other Asian countries. Furthermore, the rising construction costs and inflationary pressure means that more developers will move away from the segment in 2023.

Read More – Spending on major construction projects to put debt pressure on Chinese provinces in 2023

While more and more developers are moving away from the residential sector, the government has been investing billions of dollars into the segment in India and other global markets. In India, for instance, the government increased its investment in the affordable housing segment by 66%, as announced in Union Budget 2023 – 24. For the Pradhan Mantri Awas Yojana (PMAY) the government increased the allocation by 66% to INR 790 billion. Private players are also raising funds as part of their affordable housing fund to push more developers to undertake affordable housing projects in India.

  • In January 2023, HDFC Capital Advisors Ltd, for instance, announced that the firm had raised US$376 million for investment in the affordable housing sector. A year ago, the firm closed US$1.88 billion, which means that it had raised a total of US$2.2 billion to invest in affordable housing projects and aid developers, leading to higher adoption of such projects.

In addition to this, the firm also invests in technology companies. Going forward, the firm is planning to raise more investment from global investors for pushing the affordable housing sector in India.

Read More – The construction chemicals market is poised to experience a growing number of mergers and acquisition deals in 2023

Trends are similar in the United States, wherein government entities and private players, have announced significant investments to boost affordable housing construction and preserve middle-income housing.

  • In May 2023, the United States Department of Housing and Urban Development announced an allocation of US$382 million through the Housing Trust Fund. The allocation is aimed at helping developers undertake affordable housing projects across the country. Notably, the Housing Trust Fund complements existing Federal, state, and local efforts to increase and preserve the supply of affordable houses for low-income households in the United States.
  • In January 2023, Bank of America also announced that it will invest US$150 million in equity to preserve 3,000 affordable housing units for middle-income households. The investment is aimed at Americans that are earning between 80% to 120% of the area’s median income. The investment is announced in partnership with Enterprise Community Partners and will further support the affordable housing segment that is reeling under the macroeconomic environment pressure.

In Australia, as well, the trends are similar to those seen in the global market. With the rising inflation rate and interest rate environment, several property developers have announced liquidation over the last 12 months. This has resulted in a dramatic drawdown in new affordable housing projects. Those already in construction have been left unfinished as developers were not able to cope with the rising construction costs. This has resulted in a severe shortage in the availability of affordable houses in Australia.

Read More – The string of collapses in the residential and commercial construction sector is led by government policies undertaken during the pandemic outbreak

The report from the government released in April 2023 revealed that 330,000 workers are facing significant rental stress. Consequently, to boost the supply of affordable units in Australia, ConsTrack360 expects the government to invest a significant amount of money, enabling developers to undertake new projects and complete the existing ones, without having to worry about the rise in construction costs.

  • In March 2023, the Commonwealth government released the Housing Australia Future Fund Bill 2023. The primary objective of the fund is to support affordable housing initiatives and provide crucial aid to community housing providers, associations, and other stakeholders to address the housing shortage prevalent in the region. The hope is that the fund will offer a much-needed boost to the affordable housing sector, leading to improved living conditions and greater access to affordable housing options for people in need.

While government institutions and private players are investing billions of dollars in the sector, the affordable housing segment is expected to remain under pressure owing to macroeconomic factors. A rising interest rate environment means that mortgages will also become expensive for developers, who in turn will pass the rise in cost to homebuyers. All of these factors will continue to have a significant impact on the affordable housing construction market from the short to medium-term perspective.