Average housing prices surged 11% YoY during Q3 2024- 15th consecutive quarter of price increase starting 2021. With more than 30% rise, Delhi NCR saw the highest YoY growth, followed by Bengaluru at 24%, says CREDAI – Colliers - Liases Foras | Housing Price-Tracker Report.
The Household Consumption Expenditure Survey recent data shows that in urban areas, the share of rent in household expenditure has risen from 4.46% in 1999-2000 to 6.58% in 2023-24 - the highest in two decades. In rural areas too, rents have increased marginally, rising from 0.39% in 1999-2000 to 0.56% in 2023-24.
These figures highlight the growing burden of housing inflation across the country, from rising purchase cost to increasing rent burden. The escalating cost of housing is a matter of concern for policymakers too given the impact on country’s growth prospects.
According to Policy Circle, a thought leadership platform, this phenomenon mirrors trends in developed nations. Housing expenses constitute over 22% of household expenditures in OECD and EU countries, with some nations such as Canada and the UK reporting even higher shares. India is now confronting a similar trajectory, with housing inflation threatening to augment economic inequality and constrain economic growth.
The Indian government has acknowledged the rising housing costs and has given the RBI the target to maintain inflation between 2 to 6 per cent band, also known as the tolerance band, while the median target is 4 percent. The upcoming Union Budget provides an opportunity for the government to address the housing inflation through bold policies, right investments and subsidies for the real estate sector as well as for the broader economic goals.
RISING HOUSING COSTS IMPACT
One of the immediate impacts seen has been the fall in share of affordable housing in total sales. The sales share of affordable housing fell to 18% in 2024 from over 38% in 2019, according to Anarock data. Further, its share of total housing supply dropped to 16% in 2024 from nearly 40% in 2019 in the top seven cities.
The data clearly indicates dampening of buyer’s sentiments due unaffordability of housing causing the trigger effect, of developers launching fewer low-bracket housing projects.
On the other end, with increasing rents consuming a large portion of household income, people are forced to cut back on essential or are left with much less disposable income for discretionary spending. Such a phenomenon is averse to country’s GDP growth. The HCES data suggests that rents, which account for about 7% of urban non-food expenditure, are a significant contributor to inflation.
What’s more in a developing country like India, urbanization and consumer spending are the key to economic progress. Higher living cost in urban centres are bound to restrict mobility to cities as well as reduce customer spending. Overall, the persistent inflation in 2024 eroded disposable incomes, curtailed consumer spending, and posed challenges to economic stability in India.
The ripple effect can also be seen on construction linked segments like cement, steel, and building materials, effecting s employment generation, particularly for low-skilled workers.
Thus, the rising cost of housing can be said to have far reaching consequences complicating inflation management and monetary policy, limiting RBIs ability to lower interest rates to support economic growth.
POLICY MEASURES & SOLUTIONS
The focus on residential demand and buyer affordability remains paramount, with developers urging the government to introduce fiscal measures that would ease homeownership costs and boost market sentiment. In the upcoming budget,the real estate experts have suggested. The sector is hoping for supportive policy measures that can help resolve housing crisis and bring more affordability by incentivizing the industry.
For the customers, redefining and scaling up Pradhan Mantri Awas Yojana (PMAY) for middle-class income groups will ensure wider coverage. Reforming land-use laws and restrictive zoning laws that often inflate land prices, will unlock land supply for housing and curb housing inflation.
Developing a robust rental housing market through tax incentives for landlords, regulatory measures to stabilize rents, and encouraging Co-living segment is equally critical.
On the industry end, technology-driven solutions such as pre-fab homes and modular construction techniques can drastically reduce construction costs, bringing quality housing within budgets for the majority population.
At the state level, investments in public transportation and last mile connectivity will reduce pressure on housing in and around city centres, making suburbs and peripheral urban areas more viable for people, thereby moderating housing costs and rents.
INCREASING HOUSING AFFORDABILITY
India’s rising housing inflation is a social and economic challenge and needs multi-pronged strategy. The role of financial institutions is no less critical when discussing rising housing costs.
The Knight Frank Affordability Index which tracks the EMI (Equated Monthly Instalment) to income ratio for an average household showed steady improvement, particularly notable during the pandemic when RBI reduced the policy repo rate (REPO) to decadal lows.
The RBI later increased the REPO rate by 250 basis points over nine months starting May 2022 to address inflation, impacting affordability in 2022. Since February 2023, the steady REPO rate has countered rising prices and high interest rates, restoring affordability to current levels.
Going forward, a reduction in interest rates would lower home loan costs, countering housing inflation and more consumption, particularly in mid-incomevhomebuyer’s segment.
India’s rising housing inflation needs multi-pronged strategy from policy measures and technology solutions to reducing home loan interest and tax benefits for both developers and the homebuyers, to help address rising housing inflation.
Redefining PMAY for middle-class will ensure wider coverage and encouraging Co-living segment can curb housing inflation and stabilize rents.
In a developing country like India, urbanization and consumer spend- ing are the key to economic progress. Higher living cost in urban centres are bound to restrict mobility to cities as well as reduce customer spending.
- Affordable housing focus through increased PMAY allocation and tax incentives
- Infrastructure status for real estate sector to enable easier financing
- GST rationalization for under-construction residential properties
- Section 80-IBA for affordable housing projects
- Higher tax deductions on home loan interest
- Reforms in land acquisition policies and single-window clearance system
- Promoting rental housing through tax benefits for owners, tenants & co living assets
- Redefinition of affordable housing by raising the ceiling from ?45 lakhs
- Reduction in GST on raw materials like cement and steel
- Further investment through schemes such as SWAMIH
- Making Credit More Accessible for Developers
