Mumbai remains the most expensive housing market across the nation, revealed Knight Frank India in its Affordability Index data on Wednesday, August 16. The city's Equated Monthly Instalment (EMI) to Income Ratio increased to 55% in the first half of 2023 from 52% in 2021.
In contrast, Ahmedabad maintained its position as the most affordable housing market. Ahmedabad has an EMI-to-income ratio of 23%. Interestingly, Mumbai's affordability index has steadily improved over the past ten years. It has gone from 93% in 2010 to its current level of 55%.
The improvement was especially noticeable during the epidemic, when the RBI lowered Repo rates to historic lows. However, since January 2022, the central bank has hiked the repo by 250 bps (basis points). This is to combat growing inflation. It has had an effect on affordability and increased the EMI load by 14.4%.
In three straight monetary policy meetings this year, the RBI refrained from hiking rates. This has kept home loan interest rates steady.
The Affordability Index finds the percentage of income a household needs to have in order to pay the monthly interest on a unit. The numbers result from the use of a fixed area, a fixed number of units, an 80% loan-to-value ratio, and the median housing cost in that city.
A city with a 40% Knight Frank Affordability Index score means that, on average, households there must spend 40% of their income to pay the monthly installments on a mortgage. An EMI-to-income ratio of more than 50% is deemed unaffordable because that is the point at which banks will rarely provide a mortgage.
According to reports, there is a significant change in the fundamental structure of the market. The demand for homes has reached a multi-year high. On the other hand, demand for offices is steady despite the general economic climate.
The average reduction in affordability across markets as a result of the 250 bps increase is 2.5% in policy rates. Further interest rate increases may have an adverse effect on homebuyers' abilities.
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