The affordability of buying a house in India may be gradually becominga little less as we move into an environment of tightening interestrates, and inflationary pressures built in by global economicconditions. A combination of rising interest rates and prices hasdampened affordability in 2022 and it is likely to further erode in2023 amid rising acquisition costs. Even though affordability islikely to be impacted, the momentum inhibitor looks to be a temporaryone with India’s focus on economic growth and likely easing ofinflationary pressures expected to reverse the current interest rategrowth. While affordability is decidedly weakening, we are still someway off the worst affordability periods for all cities and unlikely tosee a repeat of those levels. This with better future sentiment isexpected to keep the residential markets in an upbeat mood for thenext year as well, says the report on Home Purchase AffordabilityIndex (HPAI) 2022. Affordability across the seven key residentialmarkets in India started to improve from 2014 onwards untilaffordability hit its peak by end of 2021.
Mumbai has been the fastest-moving city in terms of its HPAI scoreimprovement and became an affordable market with its threshold hitting 100. It is likely to slip below the threshold value of an affordablemarket but only slightly given all the macroeconomic headwinds andremain much above its HPAI low of 43 in 2013.
Affordability was at its lowest for all cities in 2013, with Mumbaibeing the most unaffordable with the average household income beingenough to just qualify for a home loan to purchase less than half thesize of a 1,000 sq. ft apartment. JLL Research’s analysis reveals thatbetween 2013 and 2021, affordability increased consistently across allcities and hit peak values, marking the best time for home purchases.
Talking to Bizz Buzz, Siva Krishnan, Managing Director, and Head ofResidential Services India, says, “What remains pertinent is that weare coming off an 18-month period of a robust recovery in residentialdemand even as prices and interest rates have moved up during thelatter part of this timeframe. And affordability despite the estimatesof a decline will still remain quite attractive and second best onlyto 2021. Also worth recognizing is the fact that homebuyers take intoaccount prevailing economic scenario, employment market prospects,income and job stability and future expectations of income, savingsand inflation.”
We are now entering the territory of a rising interest rate cycle,driven by global macroeconomic headwinds. While affordability islikely to be impacted, the momentum-inhibitor looks to be a temporaryone with India’s focus on economic growth and likely easing ofinflationary pressures expected to reverse the current interest rategrowth. The residential market stakeholders and policymakers need toremain in sync and agile to ensure that the sector continues to remainin the pink of health, he said.
Kolkata, Hyderabad, and Pune remain the most affordable cities in India.Kolkata, with a value of 192 (a value of more than 100 implies that anaverage household has more than enough income to qualify for the homeloan) is still on track to remain the most affordable residentialmarket in the country among the top seven cities, while Pune (183) andHyderabad (174) will follow, however, all three will showprogressively lower affordability levels compared to 2021 for both2022 estimates and 2023 forecasted values. Chennai (161) and Bengaluru(167) also have relatively good affordability levels.
In 2022, affordability gains have been slightly mitigated asinflationary pressures have caused developers to pass on the rise ininput costs to the buyers, demand has supported price increases andthe RBI’s repo rate hikes have resulted in higher home loan costs.
The current year has built on the gains with healthy growth ineconomic output resulting in household incomes likely to rise by anaverage of 7 per cent. Residential prices have also risen driven byrobust demand and pass-through of rising input costs onto homebuyerswith the price growth averaging 4-10 per cent across the major cities. Boththese and the repo rate -the three critical elements of affordabilityare now on a trajectory that is likely to worsen affordability levels.Macroeconomic headwinds and inflationary pressures are likely to slowdown household income growth, with residential prices under pressureas input cost increases are yet to be transmitted fully.
Dr Samantak Das, Chief Economist, and Head of Research and REIS,India, JLL said, “The affordability score is a steppingstone fordevelopers and other stakeholders toward strategic decision-makingaround project activity, pricing decisions, and other relevantparameters that could impact the affordability quotient of aprospective homebuyer. In 2021, the resumption of economic activitiesby the second half spurred a recovery in household incomes whileimproving buyer activity also supported minor price increases.”
In fact, affordability was at its best across all cities in 2021,marking it as the most opportune time for home purchases.Affordability levels are likely to trend down through the end of 2022and thereafter in 2023 as well. Mortgage rates are likely to move upfurther to near 8-year highs. Price pressures and slower income growthare further likely to create a temporary glitch for affordability, headded.
“However, this will be a temporary phase and the momentum is likely tosustain also on the expectations of moderating inflation supporting areversal in repo rate hikes even as longer loan tenures and pricingdeals will be likely measures from stakeholders to keep buyers’affordability levels within comfort,” he added.
JLL Home Purchase Affordability Index (HPAI) signifies whether ahousehold earning an average annual income (at an overall city level)is eligible for a housing loan on a property in the city, at theprevailing market price. We have derived this index, through acombination of variables which include home loan interest rates,average household income and price of the residential apartment. Theinterplay between property price, income and home loan interest ratesinfluences the ability of a household to afford a home purchase. Thecost of the property is further determined by the per sq. ft priceprevailing in the city and the average area of the apartment. It ispertinent to note that a reduction in house size may bring inaffordability, without decrease in per sq ft pricing. However, thisreduction in the size of the apartment may be a compromise on thebuyer’s side. Hence, we have kept the saleable area of the house as1,000 sq ft for a four-member household.
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