Effective housing demand is best defined as

housing need that is backed by the willingness and ability to pay or to be financed

the number of dwellings households should have by a social standard, whatever they are able to pay

housing need that is backed by the willingness and ability to pay or to be financed

the existing serviceable stock of dwellings together with all the new dwellings added to it

the gap between the number of households and the number of serviceable dwellings available

A city has thousands of unsold premium apartments and also large slum populations. Which explanation is most accurate?

Need is not effective demand: unsold flats are priced beyond needy households, so the gap is in affordable units

There is an absolute surplus of dwellings in the city, so the slum households are not in housing need at all

Slum households have no housing need, since they have already built some shelter for themselves on the land

The shortage has been overstated, because every household could simply be allotted one of the vacant flats

Need is not effective demand: unsold flats are priced beyond needy households, so the gap is in affordable units

In what way does core housing differ from a sites-and-services scheme?

The agency also builds a minimal core, such as a wet core and a room, which the household later extends

The agency builds the complete dwelling and the household pays only for the land lying under the building

The household receives a raw plot without services and must lay its own water and drainage connections

Households are moved to a distant site, whereas sites-and-services schemes upgrade the existing settlement

A 30-year-old settlement on public land has reasonably sound houses, many residents who work in the adjacent market, and no piped water or sewerage. The city has no spare land nearby. Which first response fits best?

Upgrade in situ by laying water, sewerage and drainage, paving lanes and giving security of tenure

Clear the settlement and move households to flats at the city edge, where land costs much less

Shift all households to a sites-and-services scheme on the periphery, offering them larger plots there

Upgrade in situ by laying water, sewerage and drainage, paving lanes and giving security of tenure

Demolish the settlement and rebuild it as high-rise blocks funded entirely by the state before anyone is moved

A property earns the same net income, but the market capitalisation rate for such property falls from 10% to 8%. By direct capitalisation its value will

rise by 25%, since value is inversely proportional to the capitalisation rate

fall by 20%, since value is directly proportional to the capitalisation rate itself

rise by 25%, since value is inversely proportional to the capitalisation rate

rise by 20%, since the capitalisation rate has fallen by 20 per cent

stay the same, since the net income itself has not changed at all

Which method is most appropriate for valuing a newly built school building that is not let and has no comparable sales?

The cost method: land value plus depreciated replacement cost of the building

The income method, capitalising the rent that the school would earn in the open market

The comparison method, using recent sales of residential flats in the same ward

The residual method, treating the school as a development site with a profit allowance

The cost method: land value plus depreciated replacement cost of the building

A tall residential block was built without a lift and is hard to let today. This loss of value is chiefly

functional obsolescence, because the design no longer meets what occupiers expect

physical deterioration, because the fabric of the building has worn out with use

economic or external obsolescence, because the surroundings of the site have changed

land depreciation, because the plot loses value as the building under it ages

A project costs ₹200 lakh and returns a single ₹288 lakh at the end of two years. Its IRR per year is

20%, from (1 + r)² = 288 ÷ 200 = 1.44

22%, half of the total gain over the two years

44%, the total gain over the two years

20%, from (1 + r)² = 288 ÷ 200 = 1.44

144%, the ratio of the inflow to the outlay

Project P returns its outlay in 3 years and earns little afterwards; project Q returns it in 4 years and then earns large inflows for six more years. At the required rate Q has the higher NPV. Choosing between these mutually exclusive projects, which statement is best?

Choose Q, because NPV counts the discounted inflows after payback, which payback ignores

Choose P, since the shorter payback means lower risk and the choice can safely rest on payback alone

Choose Q, because NPV counts the discounted inflows after payback, which payback ignores

Choose P, because payback accounts for the time value of money more fully than NPV does, and so is preferred

Choose neither, because projects that are mutually exclusive cannot be ranked by NPV or by payback

Which is the strongest reason to phase the development of a large township?

It matches supply to absorption, limits capital at risk, and lets early sales fund later phases

It removes the need for trunk infrastructure until the final phase of the township is launched

It guarantees that each phase will sell at a higher price than the phase before it

It matches supply to absorption, limits capital at risk, and lets early sales fund later phases

It lets all the statutory approvals be obtained after the first phase has been completely built

In bid-rent theory, commercial uses occupy the most central land mainly because

accessibility is worth more to commerce than to other uses, so it bids more and takes the centre

commercial buildings are cheaper to construct than housing, so they can bid more for any plot of land

zoning always allots the centre to commerce, whatever each use is willing to pay for the land

housing has no use for accessibility, so households bid nothing at all for any central land

accessibility is worth more to commerce than to other uses, so it bids more and takes the centre

Select the correct statements about slums and squatters.

A squatter settlement is defined by occupation of land without the owner’s permission, whatever the quality of its houses

A slum can exist on legally held land, as with decayed rental tenements in an old city core

A Census identified slum is a compact area of at least 300 persons or about 60 to 70 households of poorly built, congested tenements without proper services

A squatter settlement is defined by occupation of land without the owner’s permission, whatever the quality of its houses

Every slum is a squatter settlement on encroached public land

A slum can exist on legally held land, as with decayed rental tenements in an old city core

A Census identified slum is a compact area of at least 300 persons or about 60 to 70 households of poorly built, congested tenements without proper services

Select the correct statements about valuation.

In the income method, net income is gross rent less outgoings, and value is net income divided by the capitalisation rate

In the residual method, land value is gross development value less construction, fees, finance, contingency and developer’s profit

Under straight-line depreciation a building of cost C and salvage S loses (C − S) divided by its life each year

Land should be depreciated by the straight-line method in the same way as the building standing on it

In the income method, net income is gross rent less outgoings, and value is net income divided by the capitalisation rate

In the residual method, land value is gross development value less construction, fees, finance, contingency and developer’s profit

Under straight-line depreciation a building of cost C and salvage S loses (C − S) divided by its life each year

Which of the following belong in the market analysis for a proposed housing project?

The income distribution of the likely buyers

The absorption rate of comparable projects

The pipeline of approved and under-construction competing projects

The income distribution of the likely buyers

The absorption rate of comparable projects

The colour scheme chosen for the facade

The pipeline of approved and under-construction competing projects

Which of the following expand the supply of affordable housing?

Requiring private projects to reserve a share of units for EWS and LIG, often with extra FAR in return

Redeveloping a slum in situ, with sale of part of the land funding free rehabilitation tenements

Raising the minimum plot size and floor-area standard for all new layouts

Requiring private projects to reserve a share of units for EWS and LIG, often with extra FAR in return

Lengthening approval timelines for low-cost layouts so that each proposal is examined more thoroughly

Redeveloping a slum in situ, with sale of part of the land funding free rehabilitation tenements

Housing Economics and Real Estate: Need and Shortage, Affordable Housing, Slums, Valuation, Feasibility and Phasing

This is the second of two chapters on Part A, Section A.4 of the Architecture and Planning paper, “Town Planning, Housing and Real Estate Development”. It takes the economic half of the heading: “Concepts of housing need, demand, supply and shortage; Affordable and incremental housing; Slums, squatters and informal housing; Real estate valuation; Real estate feasibility studies and market analysis; Real Estate locational decisions and economic analysis; Project phasing and construction phasing”. It defines need, demand, supply and shortage and turns them into arithmetic; teaches sites-and-services, core housing, in-situ upgrading and incremental housing as ways to match cost to income; separates slum, squatter settlement and informal housing and sets out the policy approaches to each; values property by the comparison, cost, income and residual methods with depreciation; runs a feasibility and market analysis; and appraises locations and projects by NPV, IRR, payback and benefit-cost. The numericals are housing shortage and need, capitalised value, residual land value, depreciation, NPV, IRR, payback, break-even and phasing time.

1. Housing need, demand, supply and shortage

Housing need is the normative requirement: the number and quality of dwellings households should have by a social standard (one dwelling per household, adequate space, services and durability), whatever they can pay. Housing demand (effective demand) is need backed by willingness and ability to pay or to be financed, at a given price and place. Housing supply is the stock plus additions by new construction, conversion and upgrading, formal and informal. Housing shortage is the gap between need and adequate supply. A quantitative shortage means too few dwellings: households with no dwelling, households sharing or congested, and unfit dwellings that must be replaced. A qualitative shortage means dwellings that exist but lack services, durability or space.

Four concepts side by side
Concept	What it counts	Backed by purchasing power?
Need	Dwellings required by a standard, for every household	No; depends on the standard, not on income
Effective demand	Dwellings households will buy or rent at the going price	Yes
Supply	Existing serviceable stock plus additions	Provided by the market, the state or households themselves
Shortage (backlog)	Need minus adequate supply: the households left without a proper dwelling	Not applicable; it measures the unmet need

The arithmetic. Households = population ÷ average household size. Backlog = households − serviceable dwellings (unfit dwellings are not serviceable). Housing need over a plan period = backlog + new households formed + dwellings that will become unfit and be replaced (some studies add a vacancy allowance, a stated percentage of stock, so the market can work). Worked example. A town of 150,000 persons with household size 5 has 30,000 households. Its stock is 27,000 dwellings, 2,000 of them unfit, so serviceable dwellings = 25,000 and backlog = 30,000 − 25,000 = 5,000. Over ten years households grow by 6,000 and 1,000 more dwellings will become unfit, so need = 5,000 + 6,000 + 1,000 = 12,000 dwellings, about 1,200 a year.

What moves demand and supply. Demand follows household income, household formation (demography), price and rent, the availability and cost of credit, location and accessibility, taxes and subsidies, and expectations. Supply follows land and its price, infrastructure, finance, material and labour cost, development regulation (FAR, minimum standards), rent control and security of tenure, and the long lag between decision and completion. Housing is durable, immovable and slow to build, so supply is price-inelastic in the short run and a demand shock appears first as higher rents and prices. Filtering is the slow passage of ageing housing to lower-income households; it helps, but it never reaches the poorest in time, which is why direct measures are needed. Affordability is read as price-to-income or as housing cost to income; a common convention is that housing cost should not exceed about 30% of household income, and the stem states the rule it uses.

⚠️ Vacant flats and a large shortage can coexist

Need is not effective demand. A city can hold unsold premium flats and large slums at once, because the unsold stock is priced for households who do not need it while the households in need cannot afford any formal unit. The shortage is a mismatch of price, size and location, not only of count, so more supply of the wrong kind does not cure it.

2. Affordable and incremental housing

Housing is affordable when a household can obtain adequate housing for no more than a stated share of its income (about 30% is the usual convention) and still meet its other basic needs. Cheaper construction alone does not achieve this; the cost has to be matched to income. The levers are cheaper land, lower and phased standards, cheaper finance and instalment payment, and building in stages. Incremental housing accepts that a poor household cannot afford a finished house on day one, so it designs the first stage to be habitable and safe and the layout to grow with the household’s means. John F. C. Turner’s argument (“housing as a verb”, freedom to build) is that what housing does for a family, and the control the family has over it, matters more than its finish.

Approaches to affordable and incremental housing
Approach	What the agency provides	What the household does	Best when
Sites-and-services	Plot with secure tenure, water, sanitation, roads, power	Builds its own house in stages	Land is available and cost per household must be low; risk is a distant site
Core housing	A minimal finished core: wet core and one room, often with roof	Extends the core as means allow	A minimum of safety and sanitation must be assured from the start
In-situ upgrading	Services, drainage, paving, facilities and tenure on the existing site	Improves its own dwelling	The housing is reasonably sound and livelihoods are local; avoids displacement; lowest cost per person
In-situ redevelopment with cross-subsidy	Rebuilt tenements for residents, paid for by selling part of the land or floor area on the market	Moves to the new unit on the same land	Land value is high enough to pay for the rehabilitation; density can rise
Rental housing	Public, employer or private rental stock, rent set within reach	Pays rent, no capital outlay	Households are mobile or cannot raise a down-payment, such as migrants
Inclusionary requirement	Rule that private projects reserve a share of units or land for EWS and LIG, often with extra FAR in return	Buys or rents the reserved unit	The market is active and land value can bear the cross-subsidy

Incremental design means a plot sized to allow extension, load-bearing walls and a roof frame that allow rooms to be added or a floor built above, service lines sized for the final population, and a stage-one loan matched to income. Charles Correa’s Belapur housing in Navi Mumbai and Balkrishna Doshi’s Aranya at Indore are the usual Indian examples. Internationally, agencies funded sites-and-services and upgrading in the 1970s; by the late 1980s the enabling approach cast government as the provider of land, infrastructure, finance and regulation, with households and the market as the builders. A quick affordability check: a household earning ₹20,000 a month can afford about 30% × 20,000 = ₹6,000 a month for housing; an instalment above that fails the test however modest the house.

⚠️ Core housing is not sites-and-services

In sites-and-services the agency supplies serviced land and the household builds everything; in core housing the agency also builds a minimal finished core (wet core and a room) that the household extends. Both are incremental. In-situ upgrading, by contrast, keeps people where they are and is the first choice when the existing houses are serviceable.

3. Slums, squatters and informal housing

Three terms are often run together; keep them apart. A slum is defined by the condition of the settlement: poor, overcrowded housing, inadequate services and insecurity. A squatter settlement is defined by tenure: land occupied without the owner’s permission. Informal housing is any housing outside formal planning, land-registration or building rules, which includes squatting and also unauthorised colonies built on land the buyers purchased. The three overlap but are not the same: decayed rental tenements in an old city core can be slums on land legally held; a squatter settlement can have sound houses; an unauthorised colony can be informal without being a slum.

Definitions used in Indian statistics. The Census of India recognises three kinds of slum: notified (notified as a slum by the state or local government or development authority under any Act), recognised (recognised as a slum by the authorities but not formally notified) and identified (a compact area of at least 300 population, or about 60 to 70 households, of poorly built, congested tenements in an unhygienic environment, usually with inadequate infrastructure and lacking proper sanitary and drinking-water facilities). The Slum Areas (Improvement and Clearance) Act, 1956 provided for declaring an area a slum for improvement or clearance, and states have enacted slum Acts of their own. The UN-Habitat definition works household by household: a slum household lacks one or more of durable housing, sufficient living area, access to improved water, access to improved sanitation, and security of tenure.

Causes. Urbanisation and migration outpace formal supply; land is dear and hoarded; regulation (large minimum plots, tight FAR, slow approvals) prices formal housing beyond the poor; incomes are low and irregular and credit is out of reach; rent control shrank rental supply and upkeep; public housing reached too few; the poor must live near informal work; and weak land records leave tenure insecure. Slums are a symptom of a housing market that does not serve low-income households, not merely of poverty.

Policy approaches to slums and informal settlements
Approach	Idea	Result and limit
Eviction and clearance	Demolish and remove the settlement	Households re-form elsewhere; livelihoods are lost; costly and repeated
Public housing and relocation	Build finished tenements, often at the city edge	Cost per unit high, scale small; units sold or sublet; far from work
Sites-and-services	Serviced plots for self-build	Cheap and scalable; success depends on location and affordability
In-situ upgrading	Bring services and tenure to the existing site	Least disruptive and cheapest; needs sound housing and a defensible site
Security of tenure and regularisation	Recognise occupation, give legal rights	Encourages households to invest in their homes; legal and land-use limits remain
In-situ redevelopment with cross-subsidy	Rehouse residents on the same land, funded by market sale of part of it (Mumbai’s slum rehabilitation scheme)	No cost to the state, but only works where land value is high, and it densifies

ℹ️ The national programme in one line

The urban Pradhan Mantri Awas Yojana (PMAY-Urban, launched 2015) was built on four ways of delivering housing: in-situ slum redevelopment using land as a resource, a credit-linked subsidy, affordable housing in partnership with private builders, and beneficiary-led construction or enhancement. Programme details change; what the paper tests is the logic of which approach fits which site and which household.

4. Real estate valuation

Market value is the most probable price in an open, competitive market between a willing buyer and a willing seller, each informed and acting without compulsion. Price is what was actually paid; cost is what it took to produce; value is an opinion of worth at a date. Land is valued at its highest and best use: the use that is legally permissible, physically possible, financially feasible and maximally productive. Four methods are standard, and the skill is choosing the right one for the property.

The four valuation methods
Method	Principle and formula	Best used for
Comparison (market)	Value from recent sales of similar properties, adjusted for time, location, size and condition	Land, flats and houses in an active market
Cost (replacement)	Value = land value + (replacement cost new of the building − depreciation)	Special-purpose or new buildings with no sales or rents: schools, hospitals, public buildings
Income (capitalisation)	Value = net annual income ÷ capitalisation rate = net income × Years’ Purchase, where YP = 1 ÷ cap rate; net income = gross rent − outgoings	Rented and commercial property
Residual	Residual land value = gross development value − (construction, fees, finance, contingency and developer’s profit)	Land with development potential

Income method. Outgoings are property tax, repairs, insurance, management and an allowance for vacancy, not loan interest. Example: gross rent ₹12,00,000 a year, outgoings 25%, so net income = ₹9,00,000; at a cap rate of 7.5%, value = 9,00,000 ÷ 0.075 = ₹1.2 crore (YP = 13.33). Value and cap rate move inversely: at 6% the same income is worth ₹1.5 crore. Residual method. Gross development value ₹40 crore; construction and fees ₹20 crore; finance and contingency ₹2 crore; developer’s profit 20% of GDV = ₹8 crore. Residual land value = 40 − 20 − 2 − 8 = ₹10 crore. Because the land value is what is left over, a small error in GDV or cost is magnified in the residual.

Depreciation is the loss of a building’s value with age and use; land does not depreciate. Its sources are physical deterioration (wear and decay), functional obsolescence (an outdated layout, no lift in a tall block) and economic or external obsolescence (a change in the surroundings, zoning or demand). Straight-line: annual depreciation = (cost − salvage) ÷ life, and depreciated value = cost − annual depreciation × age. Sinking fund: a yearly instalment, put aside at interest i, that grows to (cost − salvage) at the end of life: instalment = (C − S) × i ÷ ((1 + i)ⁿ − 1). Diminishing balance: a fixed percentage of the reducing value. Example. Building cost ₹50 lakh, salvage 10% (₹5 lakh), life 60 years, age 15 years: annual depreciation = 45 ÷ 60 = ₹0.75 lakh; accumulated = 15 × 0.75 = ₹11.25 lakh; depreciated value = 50 − 11.25 = ₹38.75 lakh.

⚠️ Cap rate is not a discount rate, and cost is not value

The capitalisation rate is one year’s net income over value and carries no growth or financing; the discount rate or IRR is a whole-life return. Never divide gross rent by the cap rate (deduct outgoings first), never depreciate land, and remember that a building can be worth far less than it cost, because cost is only the cost approach’s starting point.

5. Feasibility studies and market analysis

A feasibility study asks whether a proposed project should go ahead, and it moves through tests in order. Market: is there demand at a price or rent that works? Site and technical: can it be built here, given soil, access, services and the permitted land use, FAR and set-backs? Legal and regulatory: title, approvals and registration of the project under the real-estate regulation law. Financial: cost, revenue, funding and returns (NPV, IRR, break-even). Environmental and social: impacts and clearances. Risk: sensitivity to price, cost and delay. A cheap pre-feasibility screens many ideas; a detailed study is made for the few that survive; the outcome is go, no-go or redesign.

Market analysis reads both sides of the market. Demand side: population and household growth, income distribution, employment, preferred unit type and size, and affordability. Supply side: existing stock, vacancy, the pipeline of approved and under-construction projects, competing schemes, and price and rent trends. Data are primary (surveys, interviews, broker and site checks) or secondary (Census, registration records, listings). The output is a target segment, unit mix, price, a launch pace and a marketing plan.

Market indicators and how to read them
Indicator	Meaning	Reading
Absorption rate	Units sold or let per month or quarter	The pace the project can count on; phase sizes follow from it
Months of inventory	Unsold units ÷ monthly absorption	Falling means a tightening market; rising means oversupply
Vacancy rate	Vacant units ÷ total stock	High vacancy signals oversupply or a mismatch of type and price
Capture rate	The project’s expected share of the market’s absorption	A realistic share against competitors, not the whole demand

Break-even. Units to be sold to cover fixed costs = fixed cost ÷ (price per unit − variable cost per unit). Example. Fixed costs ₹12 crore (land, approvals, trunk works), price ₹60 lakh, variable cost ₹40 lakh per unit, so the margin is ₹20 lakh and break-even = 1,200 lakh ÷ 20 lakh = 60 units. If the price falls 10% to ₹54 lakh the margin drops to ₹14 lakh and break-even rises to 1,200 ÷ 14 ≈ 86 units, a rise of about 43% from a 10% price cut. That magnification is why feasibility studies test sensitivity.

🎯 Feasible is not the same as profitable

A project can show a profit on paper and still be infeasible: the land cannot be assembled, the use is not permitted, approvals fail or the market will not absorb the units at that pace. The feasibility test is that every stage is passed, and the market study comes first because it fixes the revenue that every later number depends on.

6. Locational decisions and economic analysis

In real estate, value is largely a product of location, meaning accessibility and neighbourhood. Bid-rent theory (Alonso, building on von Thünen) says every use bids for land by what accessibility is worth to it: commerce has the steepest bid-rent curve and takes the centre, then offices, then housing, so land value and residential density fall with distance from the centre. Burgess (concentric zones), Hoyt (sectors) and Harris and Ullman (multiple nuclei) describe the resulting patterns. Site-selection factors: accessibility by road and transit, infrastructure, neighbourhood quality and social facilities, land price and availability, zoning and FAR, market catchment and competition, hazards such as flooding, and the direction of city growth. A weighted-factor matrix gives each factor a weight and each site a score, then compares the weighted sums, after screening out sites that fail any must-have criterion; hedonic pricing estimates what each attribute adds to price.

Investment appraisal measures
Measure	Definition	Decision rule
Net present value (NPV)	Sum of cash flows discounted at the required rate, less the initial outlay: NPV = Σ CFₜ ÷ (1 + r)ᵗ − I₀	Accept if NPV > 0; among exclusive options choose the highest NPV
Internal rate of return (IRR)	The discount rate at which NPV = 0	Accept if IRR exceeds the required (hurdle) rate
Payback period	Time for cumulative cash inflow to recover the outlay	Shorter is safer; ignores time value and cash after payback
Benefit–cost ratio (BCR)	PV of benefits ÷ PV of costs	Accept if BCR > 1; common for public projects

Worked examples. NPV: invest 100; inflows 40, 50 and 60 at the end of years 1, 2 and 3; required return 10%. PV = 40 ÷ 1.1 + 50 ÷ 1.21 + 60 ÷ 1.331 = 36.36 + 41.32 + 45.08 = 122.76, so NPV = +22.76, accept. IRR: invest 200 and receive 288 after two years; (1 + r)² = 288 ÷ 200 = 1.44, so r = 20% a year (not 44%, which is the two-year total). Payback: invest 100; inflows 30, 40, 50, 60; cumulative 30, 70, 120, so payback = 2 + 30 ÷ 50 = 2.6 years. Financial versus economic analysis: a private appraisal uses market prices and the investor’s cash flows; an economic appraisal of a public project counts social costs and benefits, with shadow prices and externalities.

⚠️ Payback can pick the wrong project; IRR can mislead

A project that returns its money in three years but earns little afterwards can lose to one that takes four years and earns heavily for a decade, because payback ignores everything after the cut-off and the time value of money. IRR can rank mutually exclusive projects differently from NPV when scale or timing differs, and can give several values when the cash flow changes sign more than once. When they conflict, NPV at the required rate decides.

7. Project phasing and construction phasing

Project (development) phasing divides a large development into stages that are planned, approved, financed and sold in sequence. The reasons are to match supply to market absorption and avoid unsold stock, to limit the capital at risk and the peak funding, to bring in early revenue that pays for later phases, to build infrastructure in capacity steps, to learn from the market and adjust the unit mix, and to fit land assembly and approval timing. A usual order puts land, access and trunk infrastructure first, amenities (park, school, club) early because they support sales, and dense or commercial uses later when residents exist. Each phase should be complete, serviceable and saleable on its own. Phase size is roughly the absorption rate times the time the developer will carry unsold stock: at 20 units a month, a phase of 120 units sells out in 6 months.

Construction phasing sequences the actual building. Roads and utilities go in before the houses they serve. Blocks are completed in order so that early blocks can be occupied while later ones are built, which needs safe separation of occupied and construction areas (a separate site entrance, hoardings, crane radius kept clear of occupied buildings). Start dates overlap so that labour, formwork and cranes move from block to block, and repetition lowers cost. In redevelopment the first new building is built on vacant land and the existing residents are moved into it, their old buildings are cleared for the next phase, and so on (rolling redevelopment), which saves transit rent. Overlapping phases give the network rule: total duration = sum of the start offsets + the duration of the last phase. Example. Three phases of 12 months, each starting 6 months after the one before: duration = 2 × 6 + 12 = 24 months, not 36.

Project phasing and construction phasing compared
Aspect	Project phasing	Construction phasing
Decides	What is launched, approved and sold when	In what order and overlap the work is built
Driven by	Market absorption, funding, approvals, land assembly	Site logistics, utilities, labour and equipment, occupancy safety
Main benefit	Lower risk and peak funding; early revenue	Early occupation, continuous use of crews, lower cost by repetition
Typical error	Phase larger than the market absorbs	Occupied homes next to an unsafe site, or services missing at handover

Key takeaways

Need is a standard, demand is need backed by ability to pay, supply is serviceable stock plus additions, and shortage is the unmet gap. Backlog = households − serviceable dwellings; need over a plan period = backlog + new households + replacements, plus a vacancy allowance if stated. Vacant premium flats and slums can coexist.
Affordability means housing cost within a stated share of income (about 30% by convention). Sites-and-services gives serviced land, core housing adds a minimal finished core, in-situ upgrading improves a sound settlement where it stands, and cross-subsidised redevelopment rehouses residents on the same land. Incremental design lets the house grow with the household’s means.
A slum is defined by condition, a squatter settlement by illegal tenure, informal housing by being outside formal rules; they overlap but are not equal. The Census has notified, recognised and identified slums (the last needs a compact area of at least 300 persons or about 60 to 70 households). Clearance alone only moves the problem; upgrading, tenure security and cross-subsidised redevelopment are the constructive approaches.
Valuation: comparison for active markets, cost (land + depreciated replacement cost) for special-purpose buildings, income (value = net income ÷ cap rate) for rented property, residual (value = GDV − costs − profit) for development land. Straight-line depreciation = (cost − salvage) ÷ life per year; land is not depreciated; deduct outgoings before capitalising.
A feasibility study passes market, site, legal, financial, environmental and risk tests in order; market analysis reads absorption, inventory, vacancy and capture. Break-even units = fixed cost ÷ (price − variable cost), and it is very sensitive to price. Locations are chosen by accessibility, bid-rent logic and a weighted-factor matrix.
Appraise by NPV (accept if > 0), IRR (accept if above the required rate), payback (ignores time value and later cash) and BCR (accept if > 1); when measures conflict, trust NPV. Phase projects to the market’s absorption and funding, and phase construction by overlap: duration = sum of start offsets + last phase duration.

Practice questions (20)

Attempt each one before opening the answer. Every explanation names the tempting wrong option as well as the right one, because that is where marks are lost.

Effective housing demand is best defined as
1. the number of dwellings households should have by a social standard, whatever they are able to pay
2. housing need that is backed by the willingness and ability to pay or to be financed
3. the existing serviceable stock of dwellings together with all the new dwellings added to it
4. the gap between the number of households and the number of serviceable dwellings available
Show answer
Answer: B — housing need that is backed by the willingness and ability to pay or to be financed
Effective demand is need that has purchasing power or financing behind it. The standard-based count of dwellings households should have is need, which is the tempting answer because it sounds like demand but ignores ability to pay; stock plus additions is supply, and the gap between households and serviceable dwellings is shortage.
A city has thousands of unsold premium apartments and also large slum populations. Which explanation is most accurate?
1. There is an absolute surplus of dwellings in the city, so the slum households are not in housing need at all
2. Slum households have no housing need, since they have already built some shelter for themselves on the land
3. The shortage has been overstated, because every household could simply be allotted one of the vacant flats
4. Need is not effective demand: unsold flats are priced beyond needy households, so the gap is in affordable units
Show answer
Answer: D — Need is not effective demand: unsold flats are priced beyond needy households, so the gap is in affordable units
The slum households have a real need, but no purchasing power, so they are not effective demand; the unsold stock is priced for another segment. The shortage is therefore one of affordable units, a mismatch of price, size and location. The surplus-of-dwellings reading is the tempting error because it counts dwellings and households without asking at what price.
In what way does core housing differ from a sites-and-services scheme?
1. The agency also builds a minimal core, such as a wet core and a room, which the household later extends
2. The agency builds the complete dwelling and the household pays only for the land lying under the building
3. The household receives a raw plot without services and must lay its own water and drainage connections
4. Households are moved to a distant site, whereas sites-and-services schemes upgrade the existing settlement
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Answer: A — The agency also builds a minimal core, such as a wet core and a room, which the household later extends
In both, the household finishes the house over time, but sites-and-services supplies only a serviced plot, while core housing adds a minimal built core (wet core and a room) first. Supplying a raw plot without services is the opposite of sites-and-services, and upgrading the existing settlement describes in-situ upgrading, which is the tempting confusion.
A 30-year-old settlement on public land has reasonably sound houses, many residents who work in the adjacent market, and no piped water or sewerage. The city has no spare land nearby. Which first response fits best?
1. Clear the settlement and move households to flats at the city edge, where land costs much less
2. Shift all households to a sites-and-services scheme on the periphery, offering them larger plots there
3. Upgrade in situ by laying water, sewerage and drainage, paving lanes and giving security of tenure
4. Demolish the settlement and rebuild it as high-rise blocks funded entirely by the state before anyone is moved
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Answer: C — Upgrade in situ by laying water, sewerage and drainage, paving lanes and giving security of tenure
Sound houses, local livelihoods and a missing service network point to in-situ upgrading: services and tenure on the existing site, with no displacement and the lowest cost per person. Clearance or peripheral resettlement breaks livelihoods, and with no spare land nearby, the full state-funded rebuild is both slow and unaffordable; peripheral plots only look generous.
A property earns the same net income, but the market capitalisation rate for such property falls from 10% to 8%. By direct capitalisation its value will
1. fall by 20%, since value is directly proportional to the capitalisation rate itself
2. rise by 25%, since value is inversely proportional to the capitalisation rate
3. rise by 20%, since the capitalisation rate has fallen by 20 per cent
4. stay the same, since the net income itself has not changed at all
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Answer: B — rise by 25%, since value is inversely proportional to the capitalisation rate
Value = net income ÷ cap rate, so with income I the value moves from I ÷ 0.10 = 10I to I ÷ 0.08 = 12.5I, a rise of 25%. The rise of 20% is the tempting slip of mirroring the 20% fall in the rate; value responds to the reciprocal of the rate, not to the rate itself.
Which method is most appropriate for valuing a newly built school building that is not let and has no comparable sales?
1. The income method, capitalising the rent that the school would earn in the open market
2. The comparison method, using recent sales of residential flats in the same ward
3. The residual method, treating the school as a development site with a profit allowance
4. The cost method: land value plus depreciated replacement cost of the building
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Answer: D — The cost method: land value plus depreciated replacement cost of the building
A special-purpose building with no market rent and no comparable sales is valued by the cost method: land value plus depreciated replacement cost. Capitalising a rent that is not paid is circular; flats are not comparable to a school; and the residual method values land for development, not a completed building.
A tall residential block was built without a lift and is hard to let today. This loss of value is chiefly
1. functional obsolescence, because the design no longer meets what occupiers expect
2. physical deterioration, because the fabric of the building has worn out with use
3. economic or external obsolescence, because the surroundings of the site have changed
4. land depreciation, because the plot loses value as the building under it ages
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Answer: A — functional obsolescence, because the design no longer meets what occupiers expect
The block lacks a feature the market now expects, which is functional obsolescence, a defect of design rather than of wear. Physical deterioration is wear and decay of the fabric; economic obsolescence comes from outside the property, such as changed surroundings or demand; and land does not depreciate.
A project costs ₹200 lakh and returns a single ₹288 lakh at the end of two years. Its IRR per year is
1. 22%, half of the total gain over the two years
2. 44%, the total gain over the two years
3. 20%, from (1 + r)² = 288 ÷ 200 = 1.44
4. 144%, the ratio of the inflow to the outlay
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Answer: C — 20%, from (1 + r)² = 288 ÷ 200 = 1.44
IRR is the rate at which the present value of the 288 equals the 200: 200 = 288 ÷ (1 + r)², so (1 + r)² = 1.44 and r = 20%. The 44% figure is the total two-year gain; halving it to 22% ignores compounding. Check: 200 × 1.2 × 1.2 = 288.
Project P returns its outlay in 3 years and earns little afterwards; project Q returns it in 4 years and then earns large inflows for six more years. At the required rate Q has the higher NPV. Choosing between these mutually exclusive projects, which statement is best?
1. Choose P, since the shorter payback means lower risk and the choice can safely rest on payback alone
2. Choose Q, because NPV counts the discounted inflows after payback, which payback ignores
3. Choose P, because payback accounts for the time value of money more fully than NPV does, and so is preferred
4. Choose neither, because projects that are mutually exclusive cannot be ranked by NPV or by payback
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Answer: B — Choose Q, because NPV counts the discounted inflows after payback, which payback ignores
NPV values all cash flows at the required rate, including the large inflows after year four, so the higher-NPV project Q should be chosen. Payback stops at the cut-off and ignores later cash and discounting; the argument for P confuses speed of recovery with value created. Mutually exclusive projects are ranked by NPV.
Which is the strongest reason to phase the development of a large township?
1. It removes the need for trunk infrastructure until the final phase of the township is launched
2. It guarantees that each phase will sell at a higher price than the phase before it
3. It matches supply to absorption, limits capital at risk, and lets early sales fund later phases
4. It lets all the statutory approvals be obtained after the first phase has been completely built
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Answer: C — It matches supply to absorption, limits capital at risk, and lets early sales fund later phases
Phasing ties the pace of delivery to what the market absorbs, limits peak funding and capital exposed, and lets early revenue pay for later phases. Trunk infrastructure still has to be built in capacity steps from the start; later phases are not guaranteed higher prices; and approvals cannot be deferred until after construction.
In bid-rent theory, commercial uses occupy the most central land mainly because
1. commercial buildings are cheaper to construct than housing, so they can bid more for any plot of land
2. zoning always allots the centre to commerce, whatever each use is willing to pay for the land
3. housing has no use for accessibility, so households bid nothing at all for any central land
4. accessibility is worth more to commerce than to other uses, so it bids more and takes the centre
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Answer: D — accessibility is worth more to commerce than to other uses, so it bids more and takes the centre
Bid-rent theory explains land use by willingness to pay: commerce gains most from central accessibility, so its bid-rent curve is steepest and it wins the centre, with offices and then housing further out. Zoning and construction cost are not the cause, and households do value accessibility; they simply cannot outbid commerce for it.
Select the correct statements about slums and squatters.
1. A squatter settlement is defined by occupation of land without the owner’s permission, whatever the quality of its houses
2. Every slum is a squatter settlement on encroached public land
3. A slum can exist on legally held land, as with decayed rental tenements in an old city core
4. A Census identified slum is a compact area of at least 300 persons or about 60 to 70 households of poorly built, congested tenements without proper services
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Answer: A — A squatter settlement is defined by occupation of land without the owner’s permission, whatever the quality of its houses; C — A slum can exist on legally held land, as with decayed rental tenements in an old city core; D — A Census identified slum is a compact area of at least 300 persons or about 60 to 70 households of poorly built, congested tenements without proper services
A squatter settlement is a matter of tenure, a slum a matter of condition, and the two overlap without being identical: slums may stand on legally held land, and the Census identified slum is a compact area of about 300 persons or 60 to 70 households with poor housing and services. The claim that every slum is on encroached land merges the two categories.
Select the correct statements about valuation.
1. Land should be depreciated by the straight-line method in the same way as the building standing on it
2. In the income method, net income is gross rent less outgoings, and value is net income divided by the capitalisation rate
3. In the residual method, land value is gross development value less construction, fees, finance, contingency and developer’s profit
4. Under straight-line depreciation a building of cost C and salvage S loses (C − S) divided by its life each year
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Answer: B — In the income method, net income is gross rent less outgoings, and value is net income divided by the capitalisation rate; C — In the residual method, land value is gross development value less construction, fees, finance, contingency and developer’s profit; D — Under straight-line depreciation a building of cost C and salvage S loses (C − S) divided by its life each year
The income, residual and straight-line statements are the standard formulas. Land does not depreciate; its value follows the market and its highest and best use, so depreciating it like a building is the error.
Which of the following belong in the market analysis for a proposed housing project?
1. The income distribution of the likely buyers
2. The absorption rate of comparable projects
3. The colour scheme chosen for the facade
4. The pipeline of approved and under-construction competing projects
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Answer: A — The income distribution of the likely buyers; B — The absorption rate of comparable projects; D — The pipeline of approved and under-construction competing projects
Market analysis reads demand (buyers’ incomes, household growth) and supply (stock, pipeline, vacancy, absorption). The facade colour is a design decision and tells nothing about demand or supply in the market.
Which of the following expand the supply of affordable housing?
1. Raising the minimum plot size and floor-area standard for all new layouts
2. Requiring private projects to reserve a share of units for EWS and LIG, often with extra FAR in return
3. Lengthening approval timelines for low-cost layouts so that each proposal is examined more thoroughly
4. Redeveloping a slum in situ, with sale of part of the land funding free rehabilitation tenements
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Answer: B — Requiring private projects to reserve a share of units for EWS and LIG, often with extra FAR in return; D — Redeveloping a slum in situ, with sale of part of the land funding free rehabilitation tenements
A reservation or inclusionary rule with a FAR incentive, and cross-subsidised in-situ redevelopment, both create affordable units. Raising plot-size and floor-area standards, or slowing approvals, raises cost and delay and pushes housing out of the reach of low-income households, adding to informal supply instead.
At the start of a ten-year plan a town has 40,000 households and 36,000 serviceable dwellings (one household per dwelling). Over the plan period 12,000 additional households will form, and 5% of the existing 36,000 serviceable dwellings will become unfit and must be replaced. Ignoring any vacancy allowance, the number of dwellings to be built over the plan period is ____.
Numerical answer — type the value.
Show answer
Answer: 17800
Backlog = 40,000 − 36,000 = 4,000. New households = 12,000. Replacement = 5% of 36,000 = 1,800. Need = 4,000 + 12,000 + 1,800 = 17,800 dwellings. Omitting the replacement gives 16,000, and counting only growth gives 12,000.
A shop block earns a gross rent of ₹9,60,000 a year; outgoings (property tax, repairs, management) are 25% of the gross rent. At a capitalisation rate of 9%, its value, in ₹ lakh, is ____.
Numerical answer — type the value.
Show answer
Answer: 80
Outgoings = 0.25 × 9,60,000 = 2,40,000, so net income = 7,20,000. Value = 7,20,000 ÷ 0.09 = 80,00,000 = ₹80 lakh. Capitalising the gross rent would give 106.67 lakh, which is the usual slip. Check: 80 lakh × 9% = 7.2 lakh.
A site can be developed with a gross development value of ₹60 crore, construction and fees of ₹24 crore, and finance and contingency of ₹3 crore. The developer requires a profit of 20% of GDV, and must also pay 5% of the land price in stamp duty and legal costs. The highest land price the developer can bid, in ₹ crore, is ____.
Numerical answer — type the value.
Show answer
Answer: 20
Profit = 0.20 × 60 = 12. Money left for land and its purchase costs = 60 − 24 − 3 − 12 = 21. If the land price is L, then L + 0.05L = 21, so L = 21 ÷ 1.05 = 20. Treating 21 as the land price ignores the purchase costs; check: 20 + 1 = 21.
A project requires an outlay of ₹150 lakh today and returns ₹60 lakh, ₹70 lakh and ₹80 lakh at the end of years 1, 2 and 3. At a required return of 8% a year, its NPV, in ₹ lakh to the nearest whole number, is ____.
Numerical answer — type the value.
Show answer
Answer: 29
PV = 60 ÷ 1.08 + 70 ÷ 1.1664 + 80 ÷ 1.259712 = 55.56 + 60.01 + 63.51 = 179.08. NPV = 179.08 − 150 = 29.08, which is 29 to the nearest whole number. Summing the undiscounted inflows (210) and subtracting 150 would give 60, the trap of ignoring the time value of money.
A township is built in four phases, each taking 18 months to build. Each phase starts 9 months after the previous phase starts. The number of months from the start of the first phase to the completion of the last is ____.
Numerical answer — type the value.
Show answer
Answer: 45
The last phase starts 3 × 9 = 27 months after the first and takes 18 months, so completion is at 27 + 18 = 45 months. Adding the full durations (4 × 18 = 72) would ignore the overlap.