Mumbai Set to Reach Near-Optimal Home Affordability Levels by 2025

The real estate market in India is witnessing dynamic shifts, with Mumbai, one of the most expensive housing markets, inching closer to achieving optimal affordability levels by 2025. According to the annual report by JLL, a leading real estate consultancy, Mumbai’s affordability levels are set to improve, driven by anticipated interest rate cuts and sustained growth in household incomes. This marks a significant change from a decade ago when the city’s average household income couldn’t support the purchase of an individual home.

Mumbai’s Path to Improved Affordability

The Home Purchase Affordability Index (HPAI), a metric that gauges the ratio of average household income to the minimum income required to qualify for a home loan, is poised to reflect significant improvement for Mumbai in 2024 and 2025. A value above 100 on the HPAI implies that a household earns more than enough to qualify for a housing loan. While Mumbai hasn’t reached its peak affordability yet, it’s nearing its best levels thanks to moderated price hikes and a probable 50 basis points (bps) reduction in repo rates over the next two years.

JLL’s report highlights that the rate of price increases in key cities, including Mumbai, Delhi NCR, Hyderabad, and Chennai, has consistently outpaced household income growth. However, Mumbai’s residential market is expected to benefit from modest price hikes and potential rate cuts, making it one of the more favorable housing markets in 2025.

Nationwide Trends in Housing Affordability

While Mumbai’s trajectory is promising, other markets show a mixed picture:

• Delhi NCR and Bengaluru: These regions are likely to witness a decline in affordability levels year-on-year due to significant residential price hikes that outweigh potential interest rate reductions. Despite a projected 15 bps interest rate cut in 2024, these markets might not experience a meaningful reversal in dipping affordability trends.
• Hyderabad and Chennai: Affordability levels in these cities are expected to reach three-year highs by 2025. Both cities have managed to maintain a balance between price growth and income improvement, making them attractive destinations for homebuyers.
• Kolkata: Consistently ranked as India’s most affordable residential market, Kolkata is set to retain its status through 2024 and 2025. The city may even hit new peaks in affordability next year, offering a conducive environment for home purchases.
• Pune: Alongside Mumbai, Pune is expected to approach its best affordability levels by 2025, aided by moderate price hikes and impending interest rate reductions.

Factors Influencing Housing Affordability

Interest Rates:

Interest rates play a pivotal role in determining housing affordability. JLL’s report underscores the strong correlation between interest rate cuts and improved affordability. It anticipates a combined 50 bps reduction in repo rates by 2025, spurred by favorable macroeconomic indicators and the Reserve Bank of India’s shift to a neutral stance. Even a marginal reduction of 15 bps in 2024 is expected to provide a much-needed boost to affordability levels across markets.

Household Income Growth:

Sustained growth in household incomes acts as a cushion against rising property prices. Healthy economic activity has contributed to consistent income growth, which is expected to support affordability improvements over the next two years. Moderate price increases, coupled with income growth, will ensure that housing remains within reach for many households.

Market-Specific Dynamics:

Mumbai’s unique position as a high-demand market ensures that even small changes in affordability indicators have a significant impact on its real estate dynamics. In contrast, cities like Delhi NCR and Bengaluru may continue to grapple with affordability challenges due to sharp price escalations.

Understanding the HPAI Metric

The Home Purchase Affordability Index (HPAI) is a crucial tool for assessing market accessibility. It defines eligible household income as the minimum income required to qualify for a home loan on a 1,000 sq ft apartment at prevailing market prices.

• A value of 100 indicates that an average household’s income is just sufficient to qualify for a loan.
• A value below 100 implies inadequate income levels to qualify for a loan.
• A value above 100 signifies that households earn more than enough to qualify for a housing loan.

For Mumbai and other cities, achieving higher HPAI values indicates improved market accessibility for homebuyers, creating opportunities for both buyers and developers.

Challenges and Outlook

Despite positive projections, challenges persist. The stronger price hikes observed in 2023, coupled with stagnant interest rates, resulted in a year-on-year decline in affordability for several markets, including Delhi NCR and Bengaluru. If the anticipated interest rate cuts do not materialize, affordability levels could drop to their lowest since the peak of 2021.

However, JLL’s Chief Economist, Samanthan Das, remains optimistic about the future. He emphasizes that a favorable economic environment, coupled with moderate price growth, will create a conducive period for home purchases over the next 12 months. “Better affordability levels will prevail across all markets by 2025, supported by rate cuts and sustained income growth,” he notes.

Conclusion

Mumbai’s real estate market is on the cusp of a transformative phase, with affordability levels set to improve significantly by 2025. The anticipated interest rate cuts and steady household income growth will act as key enablers, bringing renewed hope to homebuyers in the city. Alongside Mumbai, other markets like Hyderabad, Chennai, Pune, and Kolkata are poised to offer favorable conditions for residential purchases.

As affordability levels inch closer to their best levels, the coming years present a golden opportunity for buyers to invest in India’s thriving residential real estate sector. Whether in Mumbai or other key markets, the stage is set for a more accessible and sustainable housing landscape.