Home Purchase Affordability Index

India’s housing markets are currently amid a sustained bull run, driven by pivoting homeownership dynamics which have driven the successive market peaks in sales combined with enhanced velocity in project launches. The markets have also remained mostly immune to associated double-digit price growths as well as elevated interest rates over the past 2 years, indicating the resilience in market momentum.

As India remains the fastest growing economy among the larger ones, despite slight inflationary pressures, the sustained economic growth has seen the central bank – Reserve Bank of India, change its stance from withdrawal of accommodation to neutral in the latest Monetary Policy Committee (MPC) meeting, setting the stage for a rate cut cycle.

With income growth not keeping pace with the rise in residential prices across most markets and interest rates remaining sticky, affordability levels were weakened in 2023 on a y-o-y basis. That did not however, act as a momentum-inhibitor. If interest rates remain the same and a rate cut is deferred to 2025, then affordability levels by end of 2024 will likely be lower as well compared to 2023. These affordability levels still remain well above the trough of 2013 for all markets and within 80-90% range of peak affordability seen in in 2021.

We have considered a 25 bps repo rate cut by end-2024 and another 25 bps in 2025, which we anticipate as a conservative estimate for the rate cut cycle over the next 12 months. This is expected to act as a fillip and keep the residential markets at heightened activity levels.

Affordability levels were at their peak levels from H2 2021 till mid-2022 as a relative stable price environment combined with decadal low interest rates and recovering income levels supported an optimal recovery scenario in the residential market. The market has since then continued its upward momentum, seemingly unaffected by the interest rate cycle turning northwards as the central bank changed its stance amid global headwinds. Despite that, interest rates have consistently remained much below decadal highs and as a primary driver of buyer behaviour have supported sales growth, even as prices started to surge strongly.

Even as household incomes have been improving steadily supported by India’s growing economic output activity, double-digit price gains across nearly all residential markets, through 2023 and 2024 have slightly impacted affordability levels. However, with future price growth to likely moderate and a rate cut cycle seemingly nearer than far, the momentum is expected to sustain in the medium-term.

Healthy levels of income growth and lowering of interest rate will be likely buffers that will sustain market activity even in the wake of future price increases. In fact, we expect that both aforementioned factors will support affordability levels improving y-o-y in 2024 and through 2025, paving the way for sustained market performance moving forward as well.

Home purchase affordability completed its journey from its lowest point in 2013 to peak levels in 2021, going through marked improvement during this period. This indicates that a confluence of factors came together to make home purchases much more affordable over this timeframe.

From 2022 onwards, rising repo rate and price hikes spurred on by strong demand recovery worsened affordability levels through that year as well as in 2023. However, a stronger price growth was countered somewhat by the stagnancy in interest rates and improving household incomes.

In 2024, a likely 15 bps decline in interest rate as a potential repo rate cut of 25 bps in December cycles through the economy, is expected to improve affordability levels across most markets , barring Delhi NCR and Bengaluru where the strong price growths are likely to result in affordability levels still seeing a y-o-y decline. Affordability levels, in other cities are however, expected to show marginal recovery in the face of the anticipated rate cut by end-2024.

We anticipate that better affordability levels will prevail across all markets by 2025 with a combined 50 bps repo rate cut over the period as macroeconomic indicators support the RBI’s call to action with its change in stance to neutral, hopefully paving the way for a downward rate cycle. A moderate price growth and mostly sustained growth in projected household income will also act as cushions and support the improvement in overall affordability levels in 2025, indicating that the conducive period for home purchases over the next 12 months is nigh.

Mumbai’s affordability to hit near optimal levels

Mumbai is on its way to reaching close to optimal affordability levels in 2025. The market has come a long way from its time a decade ago when its household income could not guarantee even a full, individual home purchase. It is likely to see its affordability improve in 2024 as well on the back of anticipated interest rate cuts. 

Delhi NCR and South markets to see affordability levels improve y-o-y but below peak values

The rate of price hikes in the four aforementioned markets has surpassed the household income growth by a significant margin. Despite factoring in the interest rate reduction over 2024 and 2025 and amid healthy economic activity supporting further income improvement, HPAI levels are likely improve for both years but remain lower than peak values. Three-year best affordability levels likely to prevail in Hyderabad and Chennai in 2025.

Mumbai and Pune to be close to peak affordability levels by 2025; Kolkata to hit new affordability peaks by next year

Kolkata remains the most affordable residential market in India among the top seven cities and will maintain its status through 2024 and 2025, while likely hitting new affordability peaks next year. Pune along with Mumbai with moderate price hikes over the next year and impending rate cuts are likely to be near their best affordability levels by next year, bringing renewed cheer for homebuyers.

While affordability showed a y-o-y decline for the first time in 2022, the stronger price hikes in 2023 amid stagnant interest rates further worsened affordability levels in the year, albeit cushioned slightly by a healthy growth in household incomes. 2024 is likely to end with a similar trend of y-o-y dip in affordability levels for markets like Delhi NCR and Bengaluru, despite optimism of marginal interest rate cut of 15 bps. Other markets are likely to see better affordability levels y-o-y and even compared to 2022 levels. If the potential interest rate cut does not materialize, affordability levels will be lowest since 2021 peaks. This indicates the strong impact of interest rates on affordability levels. 

Home purchase decisions are an amalgamation of multiple factors, including but not limited to employment market prospects, stability of income, household savings target and broader macroeconomic factors like inflation and future expectations of income. With the Fed rate cut signalling a change in stance by the RBI, the probability of a rate cut in the future has distinctly improved. Domestic economy forecasts are sluggish for next couple of years, indicating some softness in growth, driven also by external and global economic conditions. However, India is still slated to be the best performing larger economy globally and that should support household income growth. With inflation to remain under control, there is likelihood of a repo rate reduction which is likely to be around 25 bps by December 2024 and may cumulatively be around 50 bps over the next 12-month period. We expect that a marginal interest rate reduction of 15 bps by year-end will positively impact affordability across all residential markets, except Bengaluru and Delhi where residential price hikes over 2024 are unlikely to allow a reversal in dipping affordability levels. Another possible rate cut through 2025 is likely to improve affordability levels in 2025 on a y-o-y basis for all cities. This is expected to keep the residential market on track as it continues on its growth.

The Home Purchase Affordability Index is a useful tool in matching homebuyers’ affordability quotient with the right product offerings. Actively managing affordability levels through policy interventions and improvement in household incomes will ensure demand elasticity is sustained even in a positive price growth environment. This sync between market participants and policymakers is key to ensuring that the runway for market activity remains long and resilient.

HPAI is the ratio of the average household income to the eligible household income. Eligible household income is defined as the minimum income that a household should earn in order to qualify for a home loan on a 1,000 sq ft apartment at the prevailing market price.

Interpretation:

• A value of 100 means that a household has exactly enough income to qualify for the loan

• A value less than 100 implies that an average household does not have enough income to qualify for a housing loan

• A value of more than 100 implies that an average household has more than enough income to qualify for the home loan

JLL Home Purchase Affordability Index (HPAI) signifies whether a household earning an average annual income (at an overall city level) is eligible for a housing loan on a property in the city, at the prevailing market price. We have derived this index, through a combination of variables which include home loan interest rates, average household income and price of the residential apartment. The interplay between property price, income and home loan interest rates influences the ability of a household to afford a home purchase. The cost of the property is further determined by the per sq ft price prevailing in the city and the average area of the apartment. It is pertinent to note that a reduction in house size may bring in affordability, without decrease in per sq ft pricing. However, this reduction in the size of the apartment may be a compromise on the buyer’s side. Hence, we have kept the saleable area of the house as 1,000 sq ft for a four-member household.

• Price of the property: Weighted average price at an overall city level for respective years

• Area of the property: 1,000 sq ft (saleable area) across cities

• Home loan interest rates: Average mortgage rates in public sector banks for respective years

• Loan tenure: 20 years

• To arrive at the eligible household income, the following assumptions are made:

• Loan to Value (LTV): Maximum loan offered is 80% of the property value

• Debt to Income ratio: 40% of the gross total income