Home Purchase Affordability Index 2022
Affordability likely to suffer imminent glitch, though it should remain attractive and second only to the highest affordability levels seen in 2021.
- Samantak Das
- Rohan Sharma
- Shweta Kakkar
India’s housing markets have been on an unprecedented upcycle post the first COVID wave, barring the period of Q2 2021 which coincided with the worst pandemic surge. Despite the pandemic, the fundamentals of affordability synergy with historic lows in interest rates and price stagnancy in primary markets amounting to a time correction were all cues for recovery to play out. The recovery trend since then has resulted in quarterly sales rising to historic peaks with sustained buying activity, with most demand drivers remaining intact to a great extent.
We are now entering the territory of a rising interest rate cycle, driven by global macroeconomic headwinds. Simultaneously, residential markets have displayed price growths of varying strengths across cities, with robust demand and cost-push inflation from rising input material prices playing their respective parts. While affordability is likely to be impacted, with India’s focus on economic growth and the likely easing of inflationary pressures expected to reverse the current interest rate growth, the momentum-inhibitor looks to be a temporary one,. And although affordability is decidedly weakening, we are still, in some way, off the worst affordability periods for all cities and unlikely to see a repeat of those levels. This, with better future sentiment, is expected to keep the residential markets in an upbeat mood for the next year as well.
JLL Research’s analysis shows that the three defining factors – home price stability, rising household incomes amid a low interest rate regime, seldom come together. When property prices stagnated for large periods of time between 2014 to 2018 and even further in some markets while household incomes were rising, interest rates remained sticky at moderately high levels. During COVID times, interest rates declined to their lowest but declining income levels delayed recovery. In H2 2021, and until H1 2022, income recovery, low interest rates and relative price stagnancy with attractive deals came together to create a recovery scenario the sector had been waiting for. Thereafter, the only way has been up.
In 2022 we have seen affordability gains mitigated as inflationary pressures have caused developers to pass on the rise in input costs to the buyers. Demand has supported price increment and the RBI’s repo rate hikes have resulted in higher home loan costs.
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.
- 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
Assumptions for our analysis:
Price of the property: Weighted average price at an overall city level for respective years
Area of the property: 1,000 sf (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
Affordability levels are likely to trend down through the end of 2022 and continue into 2023 as well. Mortgage rates are likely to move up to near 8-year highs. Additionally, price pressures and slower income growth are likely to create a temporary glitch for affordability, though it should remain attractive and second only to the highest affordability levels seen in 2021. Momentum is likely to sustain on the expectations of moderating inflation, supporting a reversal in repo rate hikes even as longer loan tenures and pricing deals will be likely measures from stakeholders to keep buyers’ affordability levels within a comfort range.