The demand for affordable housing in metros, tier-1 and tier-2 cities is largely based on three key factors – the presence of a strong middle class, the cost of housing and interest rates on loans.
What worked in favor of the Indian real estate industry in the early millennium was that more people with low incomes joined the middle class due to employment opportunities and a growing economy. As their income increased, their dreams grew bigger and owning a home began to seem unrealistic.
But, property prices in cities are often high, and people cannot afford homes on their own. They need someone to lend them money, and this is where home loans come into play.
rate hike cycle
Home buyers want to avail loans at lower interest rates so that they can repay their EMIs comfortably and the final price of their property does not burn a hole in their pocket.
With fiscal incentives like stamp duty waiver and lower interest rates during the pandemic, things appeared in favor of borrowers. In other words, they were not facing any problems in repaying their home loan.
The situation started worsening in May 2022 when banks started increasing interest rates repeatedly due to RBI continuously increasing the repo rate. Borrowers who were paying a 6.75 percent interest rate in May 2022 were forced to pay 9 percent or more interest by March 2023. They had the option of paying higher EMIs for the same loan or extending their loan tenure. This, one way or another, drove people away from affordable housing, because clearly, they were now unaffordable.
A report by Anarock shows that home borrowers have been paying almost 20 percent higher EMIs over the last few years. This has resulted in an 11 percent year-on-year decline in total sales to 20 percent by the first half of 2023.
Broadly, of the 2.29 lakh units sold across India’s top seven cities in the first half of 2023, the report said only 46,650 units or 20 per cent were affordable, while 57,060 affordable homes were sold out of the 1.84 lakh units sold. They went. The same quarter last year.
Fewer buyers, fewer launches
With declining demand for affordable housing projects, new launches have also declined significantly in less than three years. In 2019, while more than 50 percent of new residential units launched in the top seven cities were in the affordable segment, the share will decline to 31 percent in 2022.
Moreover, rising land prices are also forcing real estate developers to increase property prices, making affordable housing out of reach for middle-income people. It is also forcing developers to move away from cities and shift their base to the outskirts or smaller towns.
There are also factors such as large-scale layoffs globally and in India and rising construction costs that have impacted the affordable home loan sector.
layoff and manufacturing costs
The large-scale layoff of middle-income borrowers in recent times has significantly impacted their loan repayment capacity. Companies are cutting jobs largely for three reasons – they are finding it difficult to make profits in a struggling global economy, higher tax rates and disruption from technologies like artificial intelligence. For a borrower, who is already struggling to repay the loan due to high interest rates, losing a job is a double whammy.
Developers can deliver projects on time, but they cannot cope with the rising cost of construction materials. The Russia-Ukraine war has affected the supply of raw materials, leading to an increase in the price of construction materials.
Along with inflation, the rise in construction costs discourages developers from choosing affordable housing projects. As a result, they are keen to develop premium and luxury projects that can easily accommodate the increased construction costs for them.
According to the latest data on Pradhan Mantri Awas Yojana (PMAY) provided by the Ministry of Housing and Urban Development, 118.90 lakh houses were constructed under the scheme till June 2023.
For now, the ball seems to be in the regulator’s court – that is, if repo rates remain stable or fall, banks may follow suit and, in turn, help borrowers take more loans to buy homes. But, one cannot ignore the inflation factor, can one?