LAST month ten-year-old Azharuddin Ismail was woken in the middle of the night by the sound of bulldozers. As policemen beat him with a bamboo stick to shoo him and his family away, his home in Mumbai's slums was swiftly demolished. Azhar, a celebrity since appearing in the film “Slumdog Millionaire”, has since been given a new home by the filmmakers. But other residents were not so fortunate.

Tata Housing

Small flats, big profits

India's cities need at least 25m more homes, according to report from McKinsey, a consultancy, and the Federation of Indian Chambers of Commerce. In Mumbai, the commercial capital, more than 8m people now live in shantytowns, often paying substantial rent for the privilege. But buying a home of their own is way out of reach for most of them: a 70-square-metre flat in the centre of the city costs $500,000 or so.

Matheran Realty is one of several firms that think they have a solution: ultra-low-cost housing. In Karjat, 90km east of Mumbai, Matheran Realty is in the process of building 15,000 flats with prices starting at just 210,000 rupees ($4,500) for 19-square-metre units. Tata, the firm that makes the $2,500 “Nano” car, is building 1,300 basic units at Boisar, about 100km north of the city, and may add more. Priced at 390,000-670,000 rupees each, they are already oversubscribed. Other firms are planning similar developments elsewhere in India.

The cost is being kept low chiefly because the flats are being built outside big cities, where land is much cheaper. Owners are expected to commute. The units are also very small and spartan. The simplest consist of a single room with a sink in the corner and a toilet behind a partition. They are in buildings of no more than three storeys, so there is no need for expensive structural works. Instead of bricks, lightweight moulded concrete blocks are used for the walls. The concrete is often made with foam, fly-ash or other waste materials to make it lighter as well as cheaper. There are no lifts and just one staircase per block. All this means that the homes can be built very quickly and with unskilled labour.

The developers say the potential for very cheap housing in India is huge. Many of those living in slums today are employed as drivers, factory workers or tailors, with incomes of around 90,000 rupees a year—easily enough to afford a flat which costs 200,000-400,000 rupees. According to Ashish Karamchandani of Monitor Group, another consulting firm, India has 23m urban families with incomes of 60,000-130,000 rupees a year. Including rural areas, Tata Housing sees an even larger market of 180m households earning between 90,000 and 200,000 rupees.

Until very recently one of the biggest hurdles was finance. Banks were unwilling to lend money to people without credit histories or proof of permanent residence. But two government-owned banks—the National Housing Bank and the National Bank for Agriculture and Rural Development—have agreed to provide funds to finance companies so that they can offer mortgages to such buyers. To reduce risk, buyers must put down at least a quarter of the purchase price and employers must confirm their income. Borrowers are then charged little more interest than those with an established credit history.

Lenders and developers are convinced that they have struck gold. Who would have guessed that the combination of subprime loans and a building boom would have become attractive again so soon?