Weak property values and low mortgage rates are combining to push up affordability levels of customers to a near-decade high.
Weak property values and low mortgage rates are combining to push up affordability levels of customers to a near-decade high. The present year is likely to close with the affordability index at 38 and this might drop further to 33 in FY18; the index was at levels of 26 and 25 in FY03 and FY04, respectively, CLSA’s analysis shows.
Affordability, according to an analysis by CLSA, is the top in the past six years on the back of weak property prices and a six-year-low in mortgage rates. However, for the market to reach regularly low levels of FY03-04, housing rates need to correct another 15-20%.
The development in affordability nevertheless, customers would need to be prodded into purchasing homes given they expect a drop in prices of residential properties. A permutation of an around 75-basis-point decrease in mortgage rates (to 8.5%) and a 50% hike in the tax-deduction border for mortgage loans (to Rs 3 lakh) would be correspondent of a 10-12% price reduction, decreasing the need for a price cut, says the report. Such incentives will have a main impact on sales rate in the coming months.
At the moment, the focus has moved towards satisfying inventory rather than beginning new projects, especially in the wake of forthcoming Real Estate Regulatory Act (RERA).
According to a latest Knight Frank report, RERA is good for the segment but developers will need some time to get used to its particulars. They will need to realign their businesses in accordance with the Act, which could disturb launches in the short term.