Affordability, Low Inflation & Rising Buyer Confidence Signal Housing Demand Revival
The common industry perception that an increase in capital values fuels housing demand is a misconception. It is affordability that plays an important role in demand for housing. The synergies between housing demand with housing affordability across the top seven Indian cities in India (factoring in the difference between annual per-capita income growth and growth of residential prices, indicate a reasonably strong correlation.
As the above graph suggests, at any point in time when housing affordability increased, buyer demand also grew with a time lag of between 12-18 months. However, an exception to this relationship has been observed in recent years (2013-15), possibly owing to the following factors:
Individual purchasing power has improved over the last few years, with incomes rising faster than housing prices. Also, homebuyer confidence is now set to increase on the back of several sentiment-building measures, which are already showing results:
Simultaneously, reducing inflation will also infuse confidence in potential home buyers. In fact, inflation - or the consumer price index - has a major influence on people’s decision to borrow for a house purchase. Inflation rate also has a strong influence on consumers’ confidence in the economy, and their own financial stability.
There exists a strong inverse relationship (correlation of 82%) between the inflation rate and growth in home loans. The lag between the inflation and home loan growth (via interest rate reduction) is almost negligible.
Guidance from RBI forecaster surveys and other market analysts suggests that inflation will remain range-bound at 4-6%, within the comfort zone of the Central Bank. The latest inflation data may have shown a spike, but it is still expected to remain range-bound within a comfortable zone. In the near term, given increased housing affordability and purchasing power as well as benign inflation levels, the environment is conducive for housing demand to revive.
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