The cumulative increase in home loan interest rates along with an increase in residential property prices has worsened home buying affordability for the first time in ten years in 2022, according to an analysis by Knight Frank.
The Knight Frank affordability index - which tracks the EMI-to-household income ratio, a measure of how easy it is to manage total household budgets while buying a house - placed Ahmedabad as the most affordable city to own a house, followed by Kolkata and Pune. Mumbai turned out to be the least affordable.
The Knight Frank affordability index captures movement in key constituents like property prices, home loan interest rates and average household incomes to determine buyers' ability to purchase a house. Banks underwrite home loans when the EMI-to-income ratio is under 50%. This is deemed to be the threshold for affordability by the affordability index.
Ahmedabad has an affordability ratio of 22% – which means households would need to set aside 22% of their income to fund EMIs. Kolkata and Pune have an affordability ratio of 25% each in 2022.
On the other hand, Mumbai has the highest affordability ratio at 53% – the only city with above-threshold affordability. However, the affordability level in Mumbai has improved the most since 2011, according to the report.
Ahmedabad and Pune have consistently been the most affordable cities since 2017. From 46% and 39% in 2010, the home purchase affordability index in Ahmedabad and Pune has improved to 22% and 25% in 2022, respectively.
Affordability levels had improved even during the pandemic impacted years of 2020 and 2021 as residential price growth was subdued and the government aggressively cut policy rates to increase liquidity in the highly stressed economic environment.
"Despite the rise in repo rate by 225 BPS in 2022 and the increase in home prices, home affordability has only marginally reduced by 100 to 200 BPS in major cities. The severity of the impact of rise in home loan rates and in prices on the affordability index has been cushioned by a rise in incomes and growth in GDP, helping the residential market maintain its momentum. This augurs well for the industry as it had been hoping for a turn around for a while. For the new year, we hope this sales momentum will continue as we expect factors like GDP growth and inflation to remain stable," said Shishir Baijal, Chairman and Managing Director, Knight Frank India.
So far, the rate hikes have had only a marginal impact on residential absorption. While more affordable housing buyers stepped back from purchase decisions, mid-income and luxury homes sales were not markedly affected. However, there is a tolerance limit even to the most upbeat sentiment.
Readings from property consulting firm Anarock's most recent Consumer Sentiment Survey clearly indicated that if home loan interest rates rise above 9.5% mark, we can expect to see considerable housing demand contraction.
2023 will continue to witness controlled new launches in most of the top cities, showed data analysed by Anarock. The launch trend in 2022 was calculated caution, with developers refraining from putting more inventory on the market than it could reasonably absorb - especially in already abundantly supplied markets.
To illustrate, NCR - a market once notorious for chronic oversupply - saw restricted new supply, which played a major role in reducing unsold inventory there. Since this cautious approach worked well in 2022, it will certainly continue in 2023.
It expects ready-to-move-in housing to draw most of the demand in 2023. The focus of buyers opting for new launches will not waver from projects by leading and listed players, it said.
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