Homebuyer affordability declines for Indian markets in 2022, but better than pre pandemic levels: Knight Frank India study

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Home buying affordability levels in Indian markets have declined in 2022 compared to 2021, notes Knight Frank India, a real estate consultancy firm in its annual proprietary study of Affordability Index 2022.

The study noted that the 225 BPS cumulative increase in repo rate in 2022 and the consequent increase in home-loan rates, along with increase in residential prices caused the decline in affordability. However, while affordability levels in 2022 have worsened compared to 2021, they remain significantly better the pre-pandemic levels in 2019, said the study.

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All markets, except Mumbai, are recorded to be well below the threshold of comfortable affordability set at 50% ratio. Ahmedabad emerged the most affordable housing market in the country with an affordability ratio of 22% followed by Kolkata and Pune at 25% each in 2022, said the study.

Mumbai was the only one that recorded a higher than threshold affordability ratio at 53%. However, affordability levels in Mumbai have improved the most since 2011. The study also notes that Ahmedabad, Kolkata, Pune most affordable Indian housing markets of 2022

Further, Knight Frank India's proprietary Affordability Index, which tracks the EMI (Equated Monthly Installment) to total income ratio for an average household, has shown a marginal worsening in affordability levels for the first time in 10 years in 2022. Affordability levels had improved even during the pandemic impacted years of 2020 and 2021 as residential price growth was subdued and the government aggressively cut policy rates to increase liquidity in the highly stressed economic environment.

The study stated, "Knight Frank Affordability index captures movement in key constituents like property prices, home loan interest rate and average household income to determine the buyers’ ability to purchase a house."

It added, "Banks generally underwrite home loans when the EMI to Income ratio is under 50% and this is deemed to be the threshold for affordability by the Affordability Index. On that account, existing income and average ticket-size metrics across seven out of eight markets make it possible for a homebuyer to easily finance their home purchase."

Shishir Baijal, Chairman and Managing Director, Knight Frank India said, “Despite the rise in repo rate by 225 BPS in 2022 and the increase in home prices, home affordability has only marginally reduced by 100 to 200 BPS in major cities. The severity of the impact of rise in home loan rates and in prices on the affordability index has been cushioned by a rise in incomes and growth in GDP, helping the residential market maintain its momentum."

He added, "This augurs well for the industry as it had been hoping for a turn around for a while. For the new year, we hope this sales momentum will continue as we expect factors like GDP growth and inflation to remain stable.”

Outlook for 2023:

In a statement issued on December 28, Knight Frank India in its outlook had said real estate sector in India is expected to be influenced by strong and positive impact.

It said, "While 2023 may have its own challenges in the geo-politics impacting India’s real estate segment, some positive signs are emerging in the anvil. There are signs that the Eastern European war may end soon, while the global trend of inflation may start receding by the mid of new year, and that global oil prices may also stabilize. Finally, our own domestic growth will start gaining momentum as domestic inflation is also likely to remain contained. These should have a strong and positive impact on the real estate sector."