Mumbai’s housing affordability likely to slip in 2023; Kolkata to remain most reasonable: JLL

Interest rates

With interest rates rising and inflationary pressures building, house affordability is likely to erode further in 2023. Mumbai's affordability is expected to slip while Kolkata will remain the most affordable, according to the Home Purchase Affordability Index (HPAI) 2022 by JLL.

Mumbai has been the fastest-moving city in terms of its HPAI score improvement and became an affordable market with its threshold hitting 100. It is likely to slip below the threshold value of an affordable market but only slightly and remain much above its HPAI low of 43 in 2013. It is expected to hit a score of 92 in 2023.

Delhi-NCR had an HPA score of 65 in 2013 and will be at 121 in 2023; Bengaluru was at 90 in 2013 and is expected to maintain an HPAI score of 167 in 2023. Kolkata was at 87 in 2013 and is likely to be at 192 in 2023.

Affordability was at its lowest for all cities in 2013, with Mumbai being the most unaffordable with the average household income being enough to just qualify for a home loan to purchase less than half the size of a 1,000 square foot (sq ft) apartment. JLL Research’s analysis reveals that between 2013 and 2021, affordability increased consistently across all cities and hit peak values, marking the best time for home purchases.

HPAI signifies whether a household earning an average annual income (at an overall city level) is eligible for a housing loan on a property in the city, at the prevailing market price. It has derived this index, through a combination of variables which include home loan interest rates, average household income and price of the residential apartment.

The interplay between property price, income and home loan interest rates influences the ability of a household to afford a home purchase. The cost of the property is further determined by the per sq ft price prevailing in the city and the average area of the apartment. It should be noted that a reduction in house size may bring in affordability, without decrease in per sq ft pricing. However, this reduction in the size of the apartment may be a compromise on the buyer’s side. The saleable area of the house has been kept at  1,000 sq ft for a four-member household.

Kolkata, Hyderabad, and Pune remain most affordable cities in India

Kolkata, with a value of 192 (a value of more than 100 implies that an average household has more than enough income to qualify for the home loan)  is still on track to remain the most affordable residential market in the country among the top seven cities.

Pune (183)  and Hyderabad (174) will follow, however, all three will show progressively lower affordability levels compared to 2021 for both 2022 estimates and 2023 forecasted values. Chennai (161) and Bengaluru (167) also have relatively good affordability levels.

In 2022, affordability gains have been slightly mitigated as residential prices have been driven by robust demand and pass-through of rising input costs onto homebuyers with price growth averaging 4-10 percent across the major cities. Both these and the repo rate - the three critical elements of affordability - are now on a trajectory that is likely to worsen affordability levels.

“We are now entering the territory of a rising interest rate cycle, driven by global macroeconomic headwinds. While affordability is likely to be impacted, the momentum-inhibitor looks to be a temporary one with India’s focus on economic growth and likely easing of inflationary pressures expected to reverse current interest rate growth. The residential market stakeholders and policymakers need to remain in sync and agile to ensure that the sector continues to remain in the pink of health,” said Siva Krishnan, Managing Director, and Head of Residential Services India

“The affordability score is a stepping stone for developers and other stakeholders towards strategic decision-making around project activity, pricing decisions, and other relevant parameters that could impact the affordability quotient of a prospective homebuyer. In 2021, the resumption of economic activities by the second half spurred a recovery in household incomes while improving buyer activity also supported minor price increases. In fact, affordability was at its best across all cities in 2021, marking it as the most opportune time for home purchases," said Samantak Das, Chief Economist, and Head of Research and REIS, India, JLL.

"Affordability levels are likely to trend down through the end of 2022 and thereafter in 2023 as well. Mortgage rates are likely to move up further to near 8-year highs. Price pressures and slower income growth are further likely to create a temporary glitch for affordability,” he said.

“However, this will be a temporary phase and the momentum is likely to sustain also on 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 comfort,” he added.