Despite a fall in household income in 2020, Kolkata is the most affordable market this year for buying a property, compared to six other major cities across the country, according the JLL Home Purchase Affordability Index (JLL HPAI).
Mumbai continued to be the only market below the affordability threshold.
Affordability has improved across all seven major cities despite a fall in average household income. JLL said this was due to reduction in both the housing prices as well as interest rates on home loans.
The HPAI is the ratio of the average household income to the eligible household income. A value of 100 means that a household has exactly enough income to be eligible for a home loan. Below 100 implies that an average household does not have enough income to qualify for a home loan, while more than 100 means that an average household has more than enough income to qualify for the home loan.
Kolkata scores the highest with 203, followed by Hyderabad at 195, Pune 188, Chennai 178, Bengaluru 175, Delhi-NCR 136m and Mumbai at 95 during this calendar year.
"HPAI until 2019 indicates that Hyderabad had been the most affordable residential market. In 2020, Kolkata has overtaken Hyderabad to become the best market in terms of home purchase affordability," the report said.
According to the report, Mumbai is fast moving towards the affordability threshold, showing a significant improvement on JLL HPAI from 47 in 2011 to 95 in 2020, it said.
The JLL HPAI signifies whether a household earning an average annual income (at an overall city level) is eligible for a housing loan to buy a 1,000 sq ft residential property in the city, at the prevailing market price and home loan interest rate.
It analyses the interplay between three pivotal factors - property prices, income, and home loan rates to determine the current and the emerging trends in the home purchase ability of urban households. The index covers the top seven markets in India - Mumbai, Delhi NCR, Bengaluru, Chennai, Pune, Hyderabad, and Kolkata.
The JLL HPAI shows that from 2011 to 2020, home purchase affordability improved across key Indian cities which were part of the index. This was despite a bigger fall in annual household income as compared to residential property prices.
A sharp decrease in the cost of funding (average home loan rates reduced from around 8.9 percent in 2019 to 7.5 percent in 2020), more than offset the adverse impact of lower incomes on affordability, the report added.
“We believe that the initial signs of revival were visible in the residential market in the third quarter of 2020, with sales of residential units witnessing an uptick. Furthermore, our analysis suggests that despite a fall in household income in 2020, home purchase affordability has increased in 2020 across all the markets under consideration,” said Ramesh Nair, CEO and Country Head, JLL India.
“Interestingly, in 2021, we’re expecting home purchase affordability to either remain at similar levels or improve. But the broader recovery of the residential market and the likely pace of translation of demand into actual sales volumes will be dependent largely upon the economic environment and the prevailing consumer sentiments,” he added.
The future of the residential market and the sustenance of the recovery process depends on the containment of the novel coronavirus.
“The year 2021 can pan out in two different ways. If the virus is contained by Q1 2021 and economic activity resumes at full capacity, affordability is expected to improve across all the cities under consideration. In fact, in this scenario Mumbai is expected to breach the affordability threshold. If the virus outbreak is not contained in the first quarter of 2021 and economic activity remains subdued, affordability levels are likely to remain at similar levels in most cities,” said Samantak Das, Chief Economist and Head of Research & REIS India, JLL.
In the third quarter of 2020, sales increased by 34 percent versus Q2 2020. Mumbai accounted for 29 percent of the total sales in the quarter, while 22 percent of sales was contributed by Delhi-NCR. Growth in sales activity was also driven by stronger demand in Chennai, Hyderabad, and Pune.
Prices remained largely stable across all the seven markets when compared to the previous quarter.
It is important to note that developers in certain markets are providing moderate price discounts and flexible payment schemes to boost sales, thereby facilitating cash flows to tide over the crisis in the short term. These could be the first signs of a broader recovery of the residential market in the country.
Increased affordability has not been enough to drive fence sitters to effect purchases. Affordability is necessary when determining home purchases, but not enough to drive sales.
A homebuyer considers the prevailing economic condition, employment scenario and future income flows. With the current muted consumer sentiment and uncertainty around job security, what is required is policies directed towards improving the overall economic outlook, it said.