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Rising Home prices Vs Affordability

In recent few years property prices have risen to record high level. Prices of property in India grew a staggering 284% over last 10 year period.What is the reason for India’s astounding growth?

A simple case of supply and demand – India has a whole lot of people and not very much housing – and economics: India’s GDP growth over the same period closely tracks the housing price growth, at 280 per cent. That means more Indians have more money to spend on housing. As long as the Indian economy continues to grow – 5.3 per cent may be disappointing from an Indian perspective, but few other countries would balk at it – and Indians continue to gain more purchasing power and increase in disposable income of the homebuyers has made the purchase of a house most affordable in over a decade.

The average property value of housing units has appreciated to an all-time high of over Rs 52 lakh, while the annual income of the homebuyer has grown to near Rs 12 lakh, also a record high level, shows the data compiled by HDFC.

 

A sharper increase in the income levels, as compared to the housing prices, has brought down the affordability ratio to 4.4 — the lowest in more than a decade since 4.3 in the year 2004 which remains the all-time low score. A lower ratio means it has become more affordable to purchase the house.

The affordability ratio equals the average property price divided by the annual income and determines how affordable a housing unit is for a homebuyer as per his or her income.

 

Affordability Ratio = Average Property Price/Annual Income
Reason for increase in affordability

  1. The improved affordability has largely been driven by the rising disposable income, tax incentives and affordable interest rates.
  2. The increased tax incentive limits on housing loans and for the personal taxes have helped boost the demand for housing loans, while property prices have also stabilised.
  3. The increase in double-income-no-kids (DINK) population have also helped increase the disposable income, which has made purchase of house more affordable
  4. The tax incentives have lowered the effective rates on mortgages to below 4 per cent, while the same was more than double at 8-12 per cent in the early years of the current century.
  5. The mortgage penetration is the lowest in India at just 9 per cent of the GDP, comparison to many other major countries, which implies significant room for growth.
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