Are homes more affordable now?

No, shows data from the recent RBI survey

There is talk on affordable housing with tax sops offered and more developers launching homes at lower price points. House prices have been mostly stagnant in many cities in the last few years. All these would point to homes getting within the reach of many. But a recent report by the RBI shows that housing affordability has worsened.

India’s per-capita income is estimated to be ₹10,534 a month in FY19 — a 10 per cent increase from FY18, as per government data. Home price increase has averaged only 2 per cent in the last two years, as per a report from real estate consulting firm Colliers. Data from Knight Frank India noted that during the last four years, home price increase in most of the top eight cities of India had been below retail inflation growth. Also, interest rates have been cut and home loan rates are about 9 per cent. With higher income and moderate home prices and low interest rates, why are houses not affordable?

Affordability of homes can be measured with a few ratios.

Affordability index

A popular one is the ratio of house price to income (HPTI) — the median home price to the median household income in a city. Another metric is the ratio of loan to income (LTI) — the median home loan taken to the income of the borrower. A third metric is EMI to income (ETI) — median EMI paid to household income. A lower number in all these cases indicate that prices are lower relative to income and, hence, more affordability.

Data from the Reserve Bank of India’s quarterly residential asset price monitoring survey (RAPMS) on housing loans disbursed in 13 cities showed that HPTI ratio worsened from 56.1 in March 2015 to 61.5 in March 2019. Among the cities, Mumbai was the least affordable, with a HPTI of 74.4 and Bhubaneswar the most affordable score was 54.3. LTI ratio also deteriorated — from 3 to 3.4 in this period. ETI ratio was the only bright spot — it improved slightly from a high of 39.4 in June 2015 to 38.2 in March 2019.

Why it is low

What are the factors that have led to a dip in affordability in India? For one, many housing project launches were in the higher-end segment. Data from Cushman and Wakefield showed that in 2014, budget homes (priced less than ₹50 lakh) only accounted for 14 per cent of the overall launches. While this has been improving and accounts for 51 per cent of the launches in the first half of 2019, as per Knight Frank India, it will take time for the projects to be completed and the impact to be seen

Two, while monthly incomes seem to increase, there are nuances. As per a report by the Azim Premji Institute, only 1.6 per cent of the Indian workforce earns ₹50,000 or more monthly. And 57 per cent earn less than ₹10,000 monthly. Also, employment growth has been slow.These reduce the median income and, hence, affordability.

Three, a report by the RBI on household finances showed that 77 per cent of the wealth is in real estate. This leaves less room for new purchases as the wealth is not liquid. Also, based on data from real estate developers’ association Credai, the average age of the buyer has decreased from 42 earlier to about 28. Younger people typically have lower affordability as they are early in their career. That said, affordability has been inching up. The RBI data shows that HPTI improved from its peak of 62.7 in March 2018 to 61.5 in March 2019; LTI improved slightly from 3.5 to 3.4 in the same period.

Financial planning to buy

If you plan to buy a home, consider your affordability and the situation in your city. Rent versus buy data for the city as well as home loan eligibility and EMI calculators can help you get a better fix on the situation. You can then plan and save the required down-payment.

One option is to go for a smaller home that is priced lower, rather than stretch the budget. For example, paying 30 per cent of the post-tax income as EMI may be a good idea, rather than pay 40-50 percent. While it is logical to account for future salary increases when planning to take a loan that is for a long tenure, playing it safe can reduce stress. A mid-priced home can also help you save in more liquid assets.

When taking a loan, be sure to plan for adverse change in financial situations such as job loss.

The writer is an independent investment advisor

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