Housing prices little changed, but 2016 is the most affordable year ever
House affordability has improved owing to a perpetual rise in disposable incomes. Also, reasonably priced interest rates given by banks on home loans have also improved affordability factor
Real estate brokers, developers, financers, et al can get ready to do some brisk business as year 2016 has been acknowledged as the most affordable year for house purchase compared to all previous years. This motivating fact with respect to real estate was brought out in a latest data compiled by housing loan major HDFC.
Interestingly, the report hints at the revival of the real estate market and goes on to analyse how a buyer’s rising income each year is lowering the affordability ratio.
House affordability has improved owing to a perpetual rise in disposable incomes. Also, reasonably priced interest rates given by banks on home loans have also improved affordability factor.
Sam Chopra, Founder & Chairman, RE/MAX India states, "With the growing income levels of the corporate working class along with lucrative financial schemes provided by the builders to market their properties, buyers' capacity to own a house has definitely increased as compared to the previous years.”
Today, with urbanisation and nuclear families settling in Tier 1 and 2 cities, the demand for residential properties increased by 6% in India’s top eight cities during January-March, as per research conducted by Liases Foras. Sales in the Delhi NCR were up by 33% and that in Mumbai by12%. In Ahmedabad sales went up by 32% while that in Chennai it was up by 25%, Hyderabad saw 20% growth and Kolkata 14%.
One would think that home prices have come down so affordability factor has increased. No. In spite of home prices touching record high levels, an even higher rise in disposable income has made house purchasing seemingly affordable, according to the HDFC report.
Arriving to this conclusion, the data by HDFC takes into account the average property value of housing units which have risen to an all-time high of over Rs 50 lakh this year. At the same time, the annual income of an average homebuyer has also increased to record levels of over Rs 12 lakh.
The data analysts reveal how the value of property has risen for seven consecutive years, while income level has steadily climbed upwards these last 22 years.
Yet, according to one leading consultant Anuj Puri, Chairman & Country Head, JLL India, “Home prices have, in fact, been on the decline. Most new projects in the larger cities have been launched at lower prices than those which held true for comparable projects in the same locations three years ago."
"Because of the prolonged slowdown in residential real estate, there has been very little price appreciation in most cities over the past two years. In other words, homes are more affordable today than they were three years ago. Income levels have definitely increased, but low sentiment on the housing market has prevented a faster flow of such income into housing. However, with self-owned housing still the number one priority for most Indian households, the pent-up demand will eventually deploy into the market – it is just a matter of time," said Puri.
Deducing the affordability ratio
When the average property price is divided by the annual income of a person, it determines how affordable a housing unit is for the homebuyer, according to the income earned. And this figure is the affordability ratio.
So the sharp increase in income levels vis-à-vis housing prices has lowered the affordability ratio, bringing it down to 4.1 in 2016, the lowest witnessed in India so far. The affordability ratio in 2004 was 4.3 and 4.4 in 2015. Thus, looking at the previous years, this year’s lower ratio signals that house purchase has become more affordable now.
To understand this better, when we look at the affordability ratio in 1995 which stood at a high of 22, it meant that an average home buyer needed to pay 22 times of his/her annual income to purchase a house.
Room for mortgage growth in India
India will witness an interesting period in housing finance. Another indicator of affordability has been the growth of average home loan size. HDFC states its home loan size has grown to Rs 25 lakh from Rs 23.3 lakh last year.
The government’s “Housing for all” initiative bodes well for the mortgage industry. On mortgage lending, the HDFC data revealed that mortgage penetration is the lowest in India with a figure of only 9 percent of the GDP, when compared to other major countries. Denmark records the highest penetration level at 114 percent. While in the UK it is 75 percent and US is 68 percent, China’s mortgage penetration is double of India at 18 percent.
As a matter of fact, the report is out at a time when buyer sentiment is waiting for a motivating factor. The government on its part has brought RERA into force, and is regularising the real estate industry by making attempts to curb black money. Transparency for high value transactions and compliance window etc are steps by the government to address the menace of black money to bring out the true growth statistics in terms of GDP and per capita income, etc.
Moreover, with the lowering of interest rates and reduction in REPO rate, the incentive to purchase for a buyer has increased, hence boosting the sales. Chopra says the gap between prices of apartments and affordability has been narrowed through comfortable payment plans, easy EMIs that can be paid post possession, which has boosted sales. It is a buyer driven market today, he says.
Thus, the home purchase market is the most affordable now than ever and the banks are helping buyers grab low interest rates to make the home purchase attractive.