Housing Demand and Affordability in India : Implications for Housing Policy

The focus of this paper is on the demand for housing in urban India. Using rental data, the paper finds that income elasticities of housing demand are high and elastic across time. Hedonic pricing regressions confirm that this high elasticity is driven by high demand for improved water and sanitation amenities that are attached to the consumption of housing. Further, the demand estimations show that rental markets in urban India and in megacities are becoming more efficient, emerging from the shadow of legacy rent control regulation and uncertainty from the past. All the results suggest that household subsidies or other demand-side interventions are less warranted, but rather investments to increase housing supply through better service infrastructure for water, sanitation, and connectivity are better uses of public resources. The analysis also provides guidelines to improve the targeting of housing programs by means testing against the income distribution. Using one such estimate of the income distribution, the paper shows that housing affordability is improving in India. In doing so, the paper highlights the methodological challenges in measuring housing affordability in developing countries.