Reserve Bank of India Monthly Bulletin : Affordability Poor In Major Cities
A paper published in the Reserve Bank of India monthly bulletin recently highlights how affordability is poor in major cities. It measures affordability (Affordability Measure or AM) as the ratio of the equated monthly instalment to the monthly income of the household. A home becomes affordable if the EMI is less than or equal to 30 per cent of the monthly income. Lower the AM, more affordable is the loan. The paper lists cities on the basis of this parameter.
Mumbai and places around the city such as Thane, Navi Mumbai, Kalyan Dombivali, Panvel, and Mira- Bhayander remain the most unaffordable in the country for people belonging to the economically weaker section, low-income or middle income. Cities like Chennai and Bengaluru also remain out of reach for most people.
With interest rates stabilising in single digits for home loans and the government interest rate subsidy for affordable housing means many in the low-income strata can buy houses again. Government intervention is helping the Economically Weaker Section. According to one estimate, with interest rates at a decade low, stagnant property prices and a steady income growth, affordability could pick up soon.
An average household in India puts 77 per cent of total assets in real estate, according to RBI’s household finance survey published late last year. These include residential buildings, buildings used for farm and non-farm activities, constructions such as recreational facilities and rural and urban land.
Most people in India rely on real estate for retirement or generating an additional rental income. However, there is a risk to this model of funding old-age expenses or creating an additional rental income.
Since May 2014, a significant change has happened in the way the real estate sector is regulated. The introduction of the Real Estate Regulation Act (RERA) is a milestone. The demonetisation of high-value currency notes, the introduction of the goods and services tax and Benami Property Act 2016 are making investors step back and assess their finances.
Most experts believe that as incomes rise and property prices remain stagnant, there could be a revival in sales of real estate companies in the residential sector. An indicator of that is the price trend in the share price of certain companies that are big in residential property development. Godrej Properties, the Mumbai-based real estate developer, has witnessed the share price more than double in the past one year.
While the positive trend in share prices of realty developers indicates more property buying ahead, it does not mean buying property to rent out is attractive again. The average rental yield in major property markets is low at 2-3 per cent when borrowing rates are as high as 7-8 per cent and are expected to remain firm.
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