Are Homes More Affordable In India Today?

It is widely believed that homes in India are beyond the reach of its people. But if that were the case, builders in India wouldn't be rich. In a market where affordable homes are in great demand, no developer could make money without offering a product which most people can afford.  Moreover, if we compare property prices with the rising income levels, a large number of residential property in India would be affordable for a number of Indians. Even as the property prices have risen greatly over the past few decades, the income levels have gone up even higher.

In fact, the growth in average income levels has been so great that apartments in India have never been so affordable at any point in the past decade, says a recent HDFC report. HDFC calculated the affordability of houses by dividing property prices with annual income. In 2015, the ratio is 4.4.  In 2015, for instance, the average annual income of home buyers in India is around Rs 12 lakh. The average property value in 2015 is around Rs 52 lakh. In 2005, the ratio was 4.7.

It is, however, striking that this is a steep decline from the figure of 22 in 1995. In 1995, property prices were 22 times that of average income of home buyers. If you observe the figures more closely, the affordability of homes went up the most between 1995 and 2004. In a decade, the ratio declined from 22 to 4.7. In contrast, from 2005 to 2015, the decline was modest, from 4.7 to 4.4. In 2004, it was 4.3, and this is lower than the figure in 2015. In short, from 1995 to 2015, the decline in the first half was tremendous, while the decline in the latter half was modest.

So, why do people believe that homes in India are not affordable? They conclude that homes have become very expensive over years by comparing property prices today with property prices a few decades ago. Though the observation that nominal value of real estate in India has risen is true, the inference that homes have become less affordable is wrong. Indians have become more prosperous in the past two decades since the 1990s when India liberalised its economy.

People also miss that in most parts of the country, homes are not as expensive as they are in the metros. They are likely to become more and more affordable as economy grows. As countries accumulate more wealth, people are not compelled to spend a large fraction of their income on homes because there is more surplus income they can devote to other needs.