RBI residential property index trends for 3Q15 indicates a marginal increase in all India property prices. While Bangalore witnessed 11% increase in prices YoY, Mumbai, Kolkata, and NCR saw limited price improvement during the period. In addition, home affordability continued to decline over last one year.
However RBI data indicates material time correction in Mumbai, NCR and Kolkata property prices last year. Bangalore and Chennai witnessed consistent increase in property values primarily driven by end user demand. Time correction has a domino effect in regions with high proportion of investor flats, as non-commensurate returns impact asset holding capacity of the investors, resulting in property price correction.
Home affordability has declined over last one year as EMI to income ratio increased from 36% to 40% during the period. As the home affordability declines, we see a gradual shift to smaller apartments especially in Mumbai, Pune and Chennai.
While property price escalation has moderated, it has outpaced rental inflation significantly over last 3-4 years. Lower rental growth and declining affordability has resulted in deferral of purchase decision by end users leading to higher inventory level across regions.
Mortgage lending rates have been reduced by 15-20bps across banks/NBFCs post the RBI policy in Apr-15. While the reduction is directionally positive, the reduction in EMI, in our view, is not material enough to improve demand scenario in the sector.
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