Housing Affordability in Major Indian Cities
Analysis for a Layman
This article examines the trends in housing affordability in major Indian property markets. Affordability refers to the portion of monthly income that households need to spend on home loan EMI payments. Lower ratios indicate more affordable housing.
Knight Frank Analysis
Knight Frank’s analysis shows that affordability has improved in 2023 compared to 2022 across Indian cities, despite higher mortgage rates and property prices. This improvement is attributed to faster income growth compared to the rise in home prices and interest costs.
- Ahmedabad is the most affordable at 21%.
- Mumbai, although still the least affordable, has seen noticeable gains, with the ratio falling from 53% to 51%.
- Many cities have improved substantially compared to the pre-COVID year of 2019.
Driving Factors
The positive momentum is driven by India’s economic prospects, including higher GDP growth forecasts and easing inflation expectations in 2024. If the RBI cuts interest rates next year as predicted, it could significantly boost affordability further.
Overall, this data indicates rising demand, with more end-users finding residential purchases within reach, potentially spurring greater housing sales. Developers may also launch more projects if healthy volumes are sustained.
Impact on Retail Investors
For retail investors, the improvement in housing affordability is a positive sign of stronger sales and profitability ahead for real estate and banking stocks.
In the real estate sector, investor confidence may rise in developers focused on mid-range housing projects across tier 1 cities like Godrej Properties, Sobha Ltd., or Puravankara. More affordable units tend to see quicker sales, reducing funding needs.
The trend also hints at a healthier outlook for mortgage lenders like HDFC Ltd. and Can Fin Homes. Easier purchases alongside lower interest rates mean potential market expansion. This may drive loan growth and improve credit quality.
However, it’s essential to exercise caution as the current data is preliminary and comes from one consulting firm. Full-year fiscal 2024 results will provide better confirmation if developer order books and bank asset quality indeed benefit. Impacts may also lag as projects have long gestation periods.
Investors should track metrics like average residential prices vs. income growth, inventory levels, and mortgage lending rates for signs of sustained improvement. New project approvals and housing order inflows will be key quarterly figures to watch.
Tactically, real estate stocks may see near-term gains from anticipated demand growth. But long-term gains will require evidence of actual sales volumes, revenue, and profitability increases over the next 2-3 years.
Impact on Industries
The improvement in housing affordability has positive impacts on several industries:
Real Estate
Improving affordability expands the pool of potential homebuyers, spurring housing demand, supporting higher prices, and increasing viability for new projects. Developers benefit from faster inventory sell-through and cash flows to fund expansion.
Banking
More affordable prices drive loan applications. Growth in mortgages boosts overall retail lending assets and net interest incomes for banks. Risk metrics may also improve with wider ownership within mid-income segments.
Building Materials
Higher construction activity, as new housing projects launch, expands the demand for materials such as cement, tiles, paints, doors/windows, pipes, etc. Volume growth aids revenues and operating leverage for materials companies.
Furnishings
With more customers, especially young first-time buyers, the market potential increases for furniture/furnishings, decorative items, modular storage, home appliances, etc. Supported by real estate, the move-in phase necessities segment sees turnover.
Overall, the cascading effects of increased housing affordability touch many sectors, from infrastructure spending to drive development to end-consumer purchases to make use of new supply. A broad swath of industries stands to benefit.
Long Term Benefits
If improving affordability sustains over the next 5+ years, potential long-term benefits for India’s housing sector include:
- Market Expansion: Significant headroom remains with housing shortfalls still large. More affordable prices draw greater participation from India’s aspirational middle class, helping the market scale up.
- Investment Hub: As volumes, demand consistency, and infrastructure availability increase, more global institutional capital allocates to Indian commercial and residential real estate. REIT potential also grows.
- Urbanization Enabler: Housing development becomes more feasible in peripheral areas and smaller cities, guiding spatial expansion, creating new economic hubs, aiding migration, and anchoring infrastructure build-out – all crucial for urbanization.
- Economic Multiplier: With real estate contributing heavily to GDP, positive ripple effects touch many interlinked industries – banking, materials, furnishings, among others as mentioned earlier. This magnifies economic benefits.
However, risks exist, such as interest rate volatility, high inflation returning, or a broad economic slowdown stifling incomes and demand. Sustained, consistent affordability gains over longer periods are essential to realize this potential.
Short Term Positives
If improved affordability sustains over the next 1-2 years, the short-term upsides include:
- Homebuyer Euphoria: Positive sentiment returns, spurring activity in masked pent-up demand. Festive season sales may already reflect this initial euphoria as buyers seize opportunities.
- Speculator Appetite: Higher volumes attract short-term investors seeking to flip projects at completion for gains. Their activity keeps momentum going before long-term demand fully materializes.
- Developer Speed-up: Confidence in ongoing project viability provides incentives to accelerate construction. This allows faster home deliveries, cash realization, and reinvestment into new land purchases and project launches.
However, short-term risks remain around inflation rebounding and mortgage rates staying elevated through 2024. Uneven developer-level demand recovery is also likely. Investors should track project completions, inventory drawdowns, and area sold metrics rather than solely headline affordability ratios.
Companies Impacted by Improved Housing Affordability in India
Indian Companies Gaining:
- Real Estate Developers (DLF (DLF:NS), Godrej Properties (GODREJPROP:NS), Sobha Developers (SOBHA:NS)): Improved affordability is likely to boost housing demand, leading to increased sales and revenue for major developers. Higher sales could also improve developer sentiment and potentially unlock stalled projects, further expanding supply.
- Building Material Companies (Shree Cement (SHREECEM:NS), ACC (ACC:NS), Ambuja Cements (AMBUJACEM:NS)): Increased construction activity driven by higher housing demand will benefit building material companies. Rising demand for cement, steel, and other construction materials could lead to higher prices and improved profitability for these companies.
- Home Finance Companies (HDFC (HDFC:NS), LIC Housing Finance (LICHSGFIN:NS), Bajaj Housing Finance (BAJAJHOUF:NS)): Improved affordability might encourage more individuals to take out home loans, boosting the volume of loan disbursements for housing finance companies. Additionally, lower interest rate expectations in 2024 could further spur housing loan demand.
- Home Furnishing Companies (Asian Paints (ASIANPAINT:NS), Berger Paints (BERGEPAINT:NS), Home Depot (HOME:US)): Rising homeownership rates due to improved affordability could translate into increased demand for home improvement and furnishing products. This could benefit paint companies, furniture retailers, and home decor companies.
- Banks with Large Retail Operations (HDFC Bank (HDFCBANK:NS), ICICI Bank (ICICIBANK:NS), SBI (SBIN:NS)): Improved housing affordability could lead to higher retail loan growth for banks with a strong presence in the mortgage market. Increased loan volumes could boost banks’ net interest income and profitability.
Indian Companies Potentially Losing:
- Affordable Housing Developers (SBI Cards and Payment Services (SBICARD:NS), Avenue Supermarts (Avenue Supermarts:NS)): While overall housing demand might increase, improved affordability could divert some demand away from the affordable housing segment towards higher-end properties. This could potentially impact developers focused solely on affordable housing projects.
Global Companies Gaining:
- Building Material Multinationals (LafargeHolcim (LHN:SW), Holcim Ltd (HOLN:SW), HeidelbergCement (HEID:GR)): Global building material companies with operations in India could benefit from increased demand for construction materials driven by the housing market boom.
- Luxury Home Furnishing Brands (LVMH Moet Hennessy Louis Vuitton (LVMH:FP), Kering (KER:FP), Estee Lauder (EL:US)): Rising affluence among homeowners due to improved affordability could lead to increased demand for luxury home furnishing products and high-end home decor items.
Global Companies Potentially Losing:
- None identified: The news is largely positive for global companies with exposure to the Indian housing market.
Market Sentiment:
- Positive for real estate and related sectors: The news is likely to boost investor sentiment towards real estate developers, building material companies, home finance companies, and related sectors. Improved affordability could lead to higher growth prospects for these companies.
- Neutral to positive for banks: While higher housing demand could benefit banks through increased loan volumes, rising interest rates might put pressure on loan growth later in 2024. Overall, the impact on banks could be neutral to slightly positive.
Note: This analysis is based on the provided information and may not be exhaustive. Other companies could be impacted depending on their specific business models and exposure to the Indian housing market.
Citation : ET Bureau. “Housing Affordability Sees Improvement Across Cities.” Economic Times, 29 Dec. 2022.