Indian residential real estate's affordable housing segment has endured the most significant impact of the Covid-19 pandemic, struggling to recover unlike other sectors over the past two years. A recent report by ANAROCK revealed that the share of affordable housing in overall sales during the first half of 2023 decreased to approximately 20 percent, an 11 percent drop compared to the same period in 2022.

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In the top 7 cities, the affordable housing segment's share in the overall housing supply during the first half of 2023 plummeted to 18 percent, down from 23 percent in same period in 2022. This is because, as potential buyers increasingly shy away from purchase decisions, affordable housing sales have dwindled, leading developers to reduce supply.

Adding to the mounting desolation, affordable homebuyers have experienced an alarming surge of over 20 percent in their Equated Monthly Installments (EMIs) over the last two years. Floating interest rates for home loans up to Rs 30 lakh escalated from 6.7 percent in mid-2021 to nearly 9.15 percent at present.

"Home loan borrowers who paid an EMI of approximately Rs 22,700 in July 2021 are now paying around Rs 27,300 today - an increase of approximately Rs 4,600 per month. This 20 percent increase in the EMI has resulted in a jump of about Rs 11 lakh in the overall interest component - from around Rs 24.5 lakh interest payable in 2021 to approximately Rs 35.5 lakh today," said Prashant Thakur, Regional Director & Head – Research, ANAROCK Group.

With the total interest payable over a 20-year tenure now exceeding the principal amount, purchasing a property worth <Rs 40 lakh becomes a daunting financial task. Considering the Loan-to-Value (LTV) ratio, the total borrowed amount is Rs 30 lakh for a 20-year tenure. In such a scenario, the buyer paid an EMI of Rs 22,700 in 2021, when interest rates stood at around 6.7 percent.

"At this rate, the total repayment to the bank was around Rs 54.5 lakh, with the interest component being less than the total principal amount, approximately Rs 24.5 lakh. However, in the current scenario with home loan interest rates hovering around 9.15 precent, this buyer's EMI has risen to around Rs 27,300. Consequently, the total repayment to the bank has escalated to around Rs 65.5 lakh, with the interest component exceeding the total principal amount, approximately Rs 35.5 lakh," Thakur added.

The structure of home loans implies that early payments mainly consist of interest, slowing down homebuyers' equity-building process. When more of the payment goes towards interest rather than the principal, homeowners take longer to build equity and own a larger share of their property. Additionally, it reduces the opportunity to benefit from appreciation if they decide to sell the property.

The situation of home loan interest exceeding the principal amount is concerning for both individual borrowers and the broader housing market.

This would need to be addressed in the next Union Budget or even earlier via a focused policy intervention, so that the affordable housing segment is not derailed further.

Sales numbers across the top 7 cities have consistently declined since the pandemic began. According to the latest ANAROCK Research, the total sales share of affordable homes decreased to approximately 20 percent in H1 2023, compared to 31 percent during the corresponding period in 2022.

Of the approximately 2.29 lakh units sold across the top 7 cities in H1 2023, only 20 percent or about 46,650 units were classified as affordable homes. In contrast, first half of 2022 saw approximately 1.84 lakh units sold, with over 31 percent or about 57,060 units falling into the affordable category.