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Real Estate Trends: Will affordable homes hold out amid a luxury housing boom?

Real estate trends: Will affordable homes hold out amid a luxury housing boom?

With the exception of Q2 2024, the affordable housing segment in India has registered a consistent downward trend in sales for 13 straight quarters now

Following the Covid-19 pandemic, India's housing market has increasingly demonstrated a marked shift towards the luxury segment. Meanwhile the price-sensitive affordable housing market has taken a progressive hit owing to a host of factors including rising interest rates, property price rise and declining supply, among others.

Earlier this week, addressing a virtual press conference, Knight Frank India CMD Shishir Baijal flagged concerns plaguing the affordable housing segment in India. “Sales of homes priced below ₹50 lakh have declined for yet another quarter highlighting persistent challenges to affordability and availability,” he said.

According to Knight Frank's report on real estate activity in the third quarter of the ongoing calendar year, 46% of the total home sales across the top eight cities in India were concentrated in the luxury housing category which comprises homes priced at ₹1 crore and above.

Meanwhile the mid ( ₹50 lakh - 1 crore) and affordable housing (under ₹50 lakh) segments recorded a year-on-year decline of 13% and 14%, respectively.

Of the total 87,108 homes sold in the quarter ended September 2024, 40,328 units belonged to the ₹1 crore and above category. Simultaneously, the ₹50 lakh - 1 crore bracket and the under ₹50 lakh club accounted for 26,011 and 20,769 units, respectively.

More than one rationale
With the exception of Q2 2024, the affordable housing segment in India has registered a consistent downward trend in sales for 13 straight quarters now, Knight Frank data showed.

“The problem is that most of the developers have moved to the better yielding low hanging fruits where the returns are higher, sales are better, which is the upper end of the market. so affordable housing has suffered a lot because of the supply not coming in,” explained Gulam Zia, Senior Executive Director - Research, Advisory, Infrastructure, and Valuation, Knight Frank India.

Affordable housing launches drop 21% in April-June period across 7 major cities as builders focus on premium units

He added that while interest rate remains the single biggest challenge for the affordable housing market, a lack of supply addition is another significant complication.

Others agreed. “Rising property prices and interest rates have skewed the launches by developers to premium and luxury, as they are grappling with cost spikes in land, materials, and construction, squeezing their margins,” elaborated Ashwin Chadha, CEO, India Sotheby's International Realty.

However, with inflation below the Reserve Bank’s tolerance band of 4-6% in August 2024 at 3.65%, industry watchers anticipate a cut in the repo rate in coming times. This may serve as a catalyst in revival of the price-sensitive affordable housing segment, which took a stronger hit on the back of a 250-basis point hike in repo rate to 6.50% since the Covid-19 pandemic, compared to the mid and luxury segments.

Furthermore, the ₹2.30 lakh crore subsidy under the Pradhan Mantri Awas Yojana Urban 2.0 is expected to provide a fillip to the segment.

“For the supply side issue to be sorted out, it is going to take time. For the last 2-3 years we haven't been seeing new launches coming in. So, whenever the intervention of bringing the interest rates down kicks in there will be a problem because there wouldn't be enough supply in the market,” Zia pointed out.

According to developers the present definition of affordable housing makes it unviable for them to supply such homes. The government defines affordable housing as residential units that are 60 square metres at, or under ₹45 lakh in “metro areas”.