To buy or rent is a question every prospective homebuyer asks at some point. Post pandemic, this has become all the more important thanks to remote and hybrid models which have homes doubling up as workspaces. Given a choice which city would you settle in? The Moneycontrol-Liases Foras House Purchase Affordability Index helps you find answers.
Bengaluru stands out as the most affordable city in India when it comes to an individual's capacity to rent a home against the option of purchasing it and the distance one has to travel to and from the central business district.
The other top four cities are Indore, Rajkot, Vadodara and Kolkata, according to the Moneycontrol-Liases Foras House Purchase Affordability Index.
Of the 32 cities analysed, the National Capital Region (NCR) centred on New Delhi is ranked 22, the Mumbai Metropolitan Region (MMR), 24, and Hyderabad, 25.
Vizag has the lowest rental yields in the country. The number of monthly rents it will take to equal the capital value of the house in the city is much higher than the cities mentioned above.
Other cities with very low rental yields include Bhubaneswar, Patna, Tiruchirappalli and Ranchi.
Why use rental yield
The report said that the affordability of housing cannot be understood by a mere comparison of the average price in different cities. Also, the extent of urbanisation and accessible land, state policy, the type of economy and employment opportunities, which could lead to migration, are different across various cities.
As these characteristics are often captured in the rental and capital values of properties, it was decided to use the rental yield [annual rent divided by capital value] as a proxy for affordability.
The approach focuses on an individual's capacity to rent a home against the option of purchasing it. Simply put, it looks at how many months of rent are needed to equal the capital value of a home.
Using this yardstick it takes 330 months of rent to buy the average home in Bengaluru and 606 months in Vizag.
Sample size and Methodology
The study considered 32 cities with 41,482 housing projects. To correlate the sizes and ease of access in cities, different distance and ranges have been considered based on a city’s size.
Each city was divided into five distance bands based on the travel time from a project to the city centre or the Central Business District.
“All distances were then normalized on a scale of 0 to 1 and divided into 5 bands equally,” explained Pankaj Kapoor, Managing Director of Liases Foras, a consulting firm that provides data-driven business intelligence, research, risk advisory, and valuation services to banks, housing financiers, developers, corporate entities and funds.
“On assigning a distance band to each project, the average rental yield for each band in each city was determined. The cities have been ranked for affordability using Euclidean distance on rental yields in each distance band,” he added.
Euclidean distance refers to the straight line distance between 2 points on a graph.
On the basis of these parameters, Benguluru topped the Moneycontrol-Liases Foras House Purchase Affordability Index. It scored the highest in terms of rental yields in four out of the five distance bands into which each city has been divided.
The projects in Bengaluru are spread at a distance of 48 km from the city centre. Thus, each distance band consists of 9.6 km. Only the first distance band (0km - 9.6km) has a lower rental yield of 3.0 percent. The other four distance bands have rental yields of 3.8 percent, 4.4 percent, 4.8 percent and 5.0 percent respectively. There are three distance bands where the rental yield is more than 4 percent.
“Each of the distance bands in Bengaluru have rental yields more than 3 percent and these comprise areas near the city centre as well as those located in the periphery where a large part of the migrant population, the IT workforce resides. This is not the case with Hyderabad where the rental yield in the city centre is much lower than areas in the outskirts where the migrant population has settled on account of job opportunities,” Kapoor said.
Also, if one were to compare spatial mobility in Bengaluru versus Delhi, the accessibility from the city centre to the peripheral locations is far better and much less than the distance that people have to travel to reach economic hubs such as Gurgaon and Noida in Delhi-NCR.
In terms of rental yields, a house worth Rs 2 crore near the city centre in Bengaluru fetches a rental yield of 3 percent and one located in the outskirts worth Rs 40 lakh fetches almost 5 percent means that the city is more affordable in the outskirts compared to city centre, said Kapoor.
However, in Delhi-NCR, a house worth Rs 2 crore near the city centre fetches a rental yield of 2.4 percent whereas a house in the peripheral locations worth Rs 40 lakh fetches a rental yield of 2.9 percent. This means that in Delhi-NCR, the rental yields are homogenous across price bands. So, it can be concluded that the city's affordability/unaffordability is similar across locations in NCR, said Kapoor.Cities with higher rental yield bands are more affordable. This is important because capital values of properties may be speculative but rental values are not. It is perhaps due to this reason that the pandemic has had a larger impact on capital values rather than on rentals, adds Kapoor.