Knight Frank India in its proprietary Affordability Index cited that higher home loan rates have reduced affordability across all markets so far in 2023. As per the assessment of the affordability index, despite the change, Ahmedabad is the most affordable housing market amongst the top eight cities, with a ratio of 23 percent followed by Pune and Kolkata at 26 percent each, Knight Frank said.

Knight Frank's Affordability Index tracks the EMI (Equated Monthly Instalment) to income ratio for an average household and has witnessed steady improvement from 2010 to 2021 across the eight leading cities of India especially during the pandemic when the Reserve Bank of India (RBI) cut REPO rates to decadal lows.

The central bank has raised the REPO rate by 250 bps since then to address growing inflation. This has impacted affordability by an average of 2.5 percent across cities and increased the EMI load by 14.4 percent since then. However, demand has remained unimpaired and has sustained at the multi-year highs seen in first half of 2023.

Incidentally, the RBI has refrained from raising rates in the past three consecutive Monetary Policy Meetings as economic fundamentals continue to show strength and the inflation forecast remains within the upper tolerance limit of 6 percent.

Affordability Index of leading eight cities of India

(Source: Knight Frank India; Note: For H1 2023, affordability and income levels are calculated keeping all variables constant, except for the interest rate.)

EMI to household income chart

The Knight Frank Affordability Index indicates the proportion of income that a household requires, to fund the monthly instalment (EMI) of a housing unit in a particular city. So, a Knight Frank Affordability index level of 40 percent for a city implies that on an average, households in that city need to spend 40 percent of their income to fund the EMI of housing loan for that unit. An EMI/Income ratio over 50 percent is considered unaffordable as it is the limit beyond which banks rarely underwrite a mortgage.

Key assumptions:

EMI, housing unit size and price/square feet represent city-level averages.

EMI:

Loan Tenure – 20 years

Loan to Value – 80%

Home loan interest rate - Average home loan rates

Area of housing unit: House size is fixed for each city across the years, but varies within different cities taking into account the average size preference for each city.

Housing Price: Median housing price for that city

While overall demand has remained consistently high, its underlying components have changed significantly with the mid and premium segments consistently outperforming the overall market. Conversely, sales in the under Rs 5 million ticket size category have trended down. Homebuyers in this segment have a much higher dependence on home loans and are therefore more sensitive to rate hikes compared to the mid and premium segment, Knight Frank said.

This has been a significant factor in suppressing demand in this segment. Notably, sales in the mid-segment now comfortably exceed that of the affordable segment while those in the premium segment are catching up fast, it said.

Mid and premium segments consistently outperform

Shishir Baijal, Chairman and Managing Director, Knight Frank India said, “The RBI’s extremely capable handling of the inflationary scenario has inspired confidence in the country’s economic environment. This is also reflected in the residential demand which is at a multi-year high and office demand which has remained resilient even as office markets globally have been struggling. The mid and premium segments in the residential market have been consistently outperforming and points to a significant shift in the market’s underlying fabric."

"However, the 250 bps increase in policy rates has reduced affordability across markets by 2.5 percent on an average. And, while the market has remained strong thus far, further interest rate increases could put pressure on homebuyer ability and sentiments," he said.

(Edited by : Anshul)

First Published:Aug 16, 2023 5:30 PM IST