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Real Estate Affordibility Curve in Highly Unaffordable Region

Friday, September 27, 2013

Property sales in India have traditionally been driven by investors, especially in Mumbai and NCR. Among the key markets, Bengaluru and Chennai have been the key exceptions. But, in the past five years, the sales dynamics have changed with increasing participation from the white-collar segment.

Property sales volumes have moderated, project launches have remained healthy (but limited launches in the affordable segment), and incremental appetite of investors seems to be shrinking fast on weak sentiment. Thus, we believe end users are now key to new sales growth. Also, many investors are stuck with their prior investments, so incremental participation from them will likely be limited.

Property prices have risen by an average of 18% since FY12, while the recent measures by the RBI have led to a 25-50bps increase in interest rates. Salaries have grown just 11% (versus the past five-year average of 16%), due to macroeconomic slowdown and due to the pressure on corporates to reduce costs to protect profitability.

Our analysis of affordability --which we define as monthly loan payment to net income- indicates a significant deterioration in the last 1-2 years with the interest-rate cycle reversing (trending towards higher interest rates). We expect the affordability ratio (a function of interest rates, property prices and salary) to worsen over the next six months unless prices correct.

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