Why home affordability has improved?

About a decade ago, many people believed that their income and savings could never outpace the growth in real estate and, therefore, it made sense to buy a house before the gap between their savings and home prices increased further. However, over the years, with stagnant prices, lower home loan rates, higher income growth and government incentives and subsidies, buying a house isn’t that unaffordable anymore. According to a recently launched Home Purchase Affordability Index (HPAI) by JLL India, a real estate consultancy firm, “Affordability improved across India’s key markets from 2014 to 2018 led by favourable home loan rates." JLL HPAI analyzed affordability across India’s key seven cities (Mumbai, Delhi NCR, Bengaluru, Chennai, Pune, Hyderabad and Kolkata) between 2011 and 2018 and factored in home loan interest rates, average household income and the price of a 1,000 sq.ft apartment. In 2013, Hyderabad was the only affordable city, but the situation flipped by 2018, with all the cities, except Mumbai, becoming affordable, according to the index. Though Mumbai remains unaffordable, it witnessed a sharp improvement in affordability during the period. Affordability indices of other real estate consultancy firms also show the same trend. According to Knight Frank’s proprietary Affordability Index, “Mumbai is India’s most expensive housing market but has seen the affordability of homes significantly increase in the last few years. It is now estimated that a house in Mumbai will cost approximately seven times the annual household income against 11 times in 2010." As far as ideal affordability rate is concerned, according to Knight Frank, it is 4.5 times the average annual household income in a city. According to Knight Frank India Index, “Except for Mumbai (seven), NCR (five) and Hyderabad (five), all other markets are below the 4.5 affordability benchmark. Kolkata, Ahmedabad and Pune have shown improved markets in terms of affordability since 2010 and apartment prices here are just three times their average household incomes. Mumbai, while still recording a high ratio of seven, has experienced the sharpest improvement since 2010." One of the main reasons behind increase in affordability is higher growth in income compared to property prices. According to a recent research report by Colliers International, a real estate consultancy firm, “The average disposable income per annum for middle-income group has grown around 9% across seven major cities in India over the period of 2014-2018. However, the average growth in residential property prices was less than 2% during the same period. This depicts the increasing affordability of residential spaces for the middle-income group of metro cities." Another reason for rising affordability is the reducing property size. According to the Knight Frank report, “There is a decline in the average size of residential units at launch during the period of study which has contributed to the growing affordability in the market. Markets of Mumbai (-25%), Pune (-24%) and Bengaluru (-18%) have seen sharp reduction in the average size of homes since 2010." Another reason is the incentives and subsidies provided by the government for affordable houses.