Rise in home loan rates: Ahmedabad most affordable, Mumbai expensive, says report

The Affordability Index indicates the proportion of income that a household requires to fund the equated monthly installment (EMI) of a housing unit in a particular city. A index level of 40 per cent for a city implies that on an average, households in that city need to spend 40 per cent of their income to fund the EMI of housing loan for that unit.

The index stated that Ahmedabad has an EMI to income ratio of 23 per cent, followed by Pune and Kolkata at 26 per cent each. The National Capital Region has a ratio of 30 per cent, and Bengaluru and Chennai 28 per cent.

Meanwhile, an EMI to income ratio over 50 per cent is considered unaffordable as it is the limit beyond which banks rarely underwrite a mortgage.

With a ratio of 55 per cent, Mumbai is the most expensive housing market. In the first half of 2023, Mumbai has witnessed two percentage increase in the ratio from 53 per cent in 2022.

The index has witnessed a steady improvement from 2010 to 2021 across the eight leading cities of India, especially during the pandemic when the Reserve Bank of India (RBI) cut repo rates to decadal lows.

The central bank has raised the Repo rate by 250 bps since to address inflation. This has impacted affordability by an average of 2.5 per cent across cities, and increased the EMI load by 14.4 per cent.

However, demand has remained unimpaired and has sustained at the multi-year highs seen in H1 2023.

While overall demand has remained consistently high, its underlying components have changed significantly with the mid and premium segments (Rs 5 million – Rs 10 million and above Rs 10 million, respectively) consistently outperforming the overall market. Conversely, sales in the under Rs 5 million ticket size category have trended down. Homebuyers in this segment have a much higher dependence on home loans and are therefore more sensitive to rate hikes compared to the mid and premium segment.

This has been a significant factor in suppressing demand in this segment. Notably, sales in the mid-segment now comfortably exceed that of the affordable segment while those in the premium segment are catching up fast.

Shishir Baijal, Chairman and Managing Director, Knight Frank India said, “The 250 bps increase in policy rates has reduced affordability across markets by 2.5 per cent on an average. While the market has remained strong thus far, further interest rate increases could put pressure on homebuyer ability and sentiments.”