Weak property prices and low mortgage rates are combining to push up affordability levels of consumers to a near-decade high. The current year is likely to close with the affordability index at 38 and this could 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 best 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 cyclically low levels of FY03-04, housing prices need to correct another 15-20%.
The improvement in affordability notwithstanding, customers would need to be prodded into buying homes given they expect a drop in prices of residential properties. A combination of an around 75-basis-point reduction in mortgage rates (to 8.5%) and a 50% hike in the tax-deduction limit for mortgage loans (to Rs 3 lakh) would be equivalent of a 10-12% price reduction, reducing the need for a price cut, says the report. Such incentives will have a major impact on sales velocity in the coming months.
At the moment, the focus has shifted towards liquidating inventory rather than launching new projects, especially in the wake of upcoming Real Estate Regulatory Act (RERA).
According to a recent Knight Frank report, RERA is good for the sector but developers will need some time to get used to its intricacies. They will need to realign their businesses in accordance with the Act, which could affect launches in the short term.
