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Property research firms suggest that the demand for affordable housing has declined substantially in India, compared to the mid and high-range segments.

In Short

• Affordable housing demand drops in India due to interest rate hike
• Mid and premium housing segments remain resilient in demand
• More rate hikes could hurt housing market sentiments

In an emerging nation such as India, affordability plays a significant role when making purchases, particularly for substantial items like homes and residential properties.

However, recent data highlighted by property research firms show that the demand for affordable housing has declined substantially in India, compared to the mid and high-range segments

Demand for affordable housing hit

A recent report by renowned property consultant firm Knight Frank India indicated that the sales of affordable housing in India have gone down significantly, following the Reserve Bank of India’s (RBI) aggressive 250 basis point interest rate hike, which has significantly increased the cost of housing loans.

It suggested that the category of houses priced under Rs 50 lakh has been profoundly affected after the RBI’s interest rate hike.

Sales in this segment have declined, primarily because homebuyers in this category have a higher reliance on home loans and are consequently more sensitive to interest rate hikes.

While the RBI has paused its rate-hike cycle for now, interest rates on housing loans remain elevated, with some banks increasing the minimum interest rate on existing housing loans to 9 per cent. As a result, many of them can no longer afford to purchase homes due to increased EMIs.

Meanwhile, real estate consultant Anarock said in a report last month that rising land prices and input costs have also contributed to the decline in demand for affordable housing in India.

It said of the 2.29 lakh units sold in the top 7 Indian cities in the first half of 2023, only 20 per cent, or just over 46,000 units were affordable houses priced at less than Rs 40 lakh. In the corresponding period a year ago, sales of affordable housing accounted for 30 per cent, or 57,060 units, of the total 1.84 lakh houses sold.

"The total sales share of this erstwhile poster-boy segment is down to approximately 20 percent in H1 2023 against 31 percent in the corresponding period in 2022," Anarock Group chairman Anuj Puri.

The Knight Frank report suggests that over the past year, the cost of EMI has surged sharply across top cities in the country. It highlighted that EMI-to-income ratios have increased by approximately 1-2 percentage points, largely due to the central bank’s 250 basis point rate hike since last year.

The report further noted that the RBI’s aggressive rate hike to contain inflation has led to an average 14.4 per cent rise in EMI burdens across cities.

More demand for mid and premium segments

While demand for affordable housing has taken a big hit after RBI’s aggressive interest rate hikes, it has not had a major effect on mid and premium-segment housing.

The Knight Frank report said the mid and premium segments have consistently displayed robust demand. The sales for houses valued between Rs 50 lakh and Rs 1 crore have increased to around 59,000 units this year, while sales for premium houses priced over Rs 1 crore have risen to 47,000 units.

Shishir Baijal, chairman and managing director of Knight Frank India, backed the RBI’s handling of inflation but warned that any further rate hike could pressurise homebuyers and impact market sentiments.

"The RBI's extremely capable handling of the inflationary scenario has inspired confidence in the country's economic environment. This is also reflected in the residential demand which is at a multi-year high and office demand which has remained resilient even as office markets globally have been struggling,” he said.

“The mid and premium segments in the residential market have been consistently outperforming and points to a significant shift in the market's underlying fabric. However, the 250 bps increase in policy rates has reduced affordability across markets by 2.5 per cent on average. And, while the market has remained strong thus far, further interest rate increases could put pressure on homebuyer ability and sentiments,” he added.

Writen By:

Koustav Das

Published On:

Aug 18, 2023