The silent slowdown in affordable housing and why it matters for India's economic growth

India’s residential real estate market is sending two very different signals. On one side, the sector continues to attract record capital: in the top seven cities, residential transaction values crossed ₹6 lakh crore in 2025, up around 6 per cent year-on-year, even as unit sales fell about 14 per cent, while institutional investments in real estate stayed strong, reaching $8.1–10.4 billion, indicating continued investor confidence.

On the other side, the country's most critical housing segment is steadily disappearing. Affordable housing, once the backbone of residential supply, accounted for just 6 per cent of new launches in Q2 2026, down from nearly 52 per cent in 2018, according to ANAROCK Research. This is not merely a shift in consumer preference or a temporary market cycle.

It is evidence of a structural imbalance where value creation is increasingly concentrated in premium housing while volume-driven, entry-level homeownership continues to weaken. The broader market numbers reinforce this divergence.

Residential sales across the top seven cities declined 6 per cent year-on-year to 90,715 units in Q2 2026, while developers launched nearly 1.06 lakh units, a 7 per cent increase over the previous year. As a result, unsold inventory rose to more than 6.16 lakh units, despite average residential prices appreciating by around 7 per cent.

According to ANAROCK Research, launches are increasingly concentrated in the ₹80 lakh to ₹2.5 crore categories, while homes priced below ₹40 lakh have become a negligible portion of fresh supply. The market is therefore generating higher transaction values but serving a progressively narrower buyer base.

This divergence matters because affordable housing is far more than a social welfare segment. It is one of India’s strongest economic multipliers. Real estate currently contributes nearly 7 per cent to India’s GDP and is projected to reach around 10-13 per cent by the mid-2030s, with some industry reports even targeting 18 per cent by 2047, according to industry and government estimates.

Within this contribution, affordable housing generates widespread economic activity through construction, manufacturing, financial services and household wealth creation. The construction sector alone supports more than 65 million workers, making it India's second-largest employer, while residential development stimulates demand across over 250 ancillary industries, including steel, cement, electrical equipment, paints, tiles and logistics.

A slowdown in affordable housing therefore extends well beyond developers' balance sheets; it weakens employment generation, domestic consumption and industrial demand. The affordability challenge is equally evident from the buyer's perspective. The price-to-income ratio has reached 14.3 in the Mumbai Metropolitan Region and 10.1 in Delhi-NCR, significantly above levels generally considered sustainable.

Meanwhile, EMI-to-income ratios have increased from 43 per cent to nearly 60 per cent for budget buyers and from 28 per cent to around 40 per cent for middle-income households over the past few years. The obvious question is whether demand has weakened or supply has become financially unviable. The evidence points overwhelmingly towards the latter.

In several metropolitan markets, land costs account for as much as 60-63 per cent of the overall project cost. Since commercial banks are prohibited from financing land acquisition, developers depend on private credit and Alternative Investment Funds, where borrowing costs during the land acquisition stage range between 18 per cent and 20 per cent.

By the time construction inflation, approval expenses, compliance costs and financing charges are added, delivering homes below the current affordable housing threshold becomes commercially unattractive. The issue, therefore, is not the absence of buyers but the economics of producing homes that remain affordable.

The capital market has also evolved in ways that unintentionally reinforce this trend. Following the implementation of RERA, the NBFC liquidity crisis, the pandemic and tighter financial discipline, institutional capital has increasingly concentrated around well-capitalised developers with proven execution capabilities.

India witnessed 219 IPOs raising nearly ₹1.8 lakh crore in FY26, while established developers mobilised close to $2.99 billion through IPOs and Qualified Institutional Placements during FY25. At the same time, five listed REITs now command a combined market capitalisation of around ₹2.1 lakh crore, according to SEBI and ANAROCK Capital.

While this institutionalisation has strengthened governance and transparency, it has also encouraged developers to prioritise premium residential projects, commercial assets and income-generating portfolios that offer superior returns on capital compared to affordable housing.

Infrastructure investment further illustrates this paradox. India's metro rail network now spans more than 1,000 kilometres across 23 cities, while NHAI capital expenditure touched ₹2.44 lakh crore in FY26, according to government data. These investments have unquestionably enhanced urban connectivity and unlocked new development corridors.

Yet rising infrastructure has simultaneously pushed up surrounding land values, encouraging developers to build premium projects instead of affordable housing. Consequently, lower-income households are increasingly displaced to peripheral locations, where commuting costs and travel time significantly erode affordability. In many cities, the challenge is therefore no longer simply owning a home but accessing one that remains economically connected to employment.

Perhaps the clearest indication that this is a structural issue lies in the housing shortage itself. The Anna Roy Committee under NITI Aayog estimated India's urban housing shortage at approximately 2 crore units, while projections suggest that a total of nearly 3 crore (30 million) affordable homes will be required by 2030 after accounting for both existing shortages and future urban demand.

Despite a 179 per cent increase in PMAY-Urban allocation to ₹22,025 crore in FY27, PRS India notes persistent underspending under the programme, limiting the pace of delivery. Unless supply-side viability improves alongside public investment, this funding alone is unlikely to bridge the deficit.

Restoring this segment requires more than subsidies. It calls for revisiting affordable housing price definitions for metro markets, reintroducing targeted fiscal incentives such as Section 80-IBA, unlocking public land through structured PPPs, enabling higher densities around transit corridors and reducing financing costs during the land acquisition stage.

India's real estate market has become stronger, more transparent and more institutional over the past decade. The next test is whether it can also become more inclusive. If affordable housing continues to remain structurally unviable, India risks building a larger property market without building a broader homeownership economy.

The writer is the director of Eros Group, a leading realty firm