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In the Indian residential real estate market, affordable housing suffered the greatest impact of the Covid-19 pandemic - and unlike the other segments, has not recovered in the last two years. With buyers of this segment increasingly desisting from purchase decisions, affordable housing sales are languishing, and developers have accordingly curtailed its supply.

A recent report by ANAROCK finds that the share of affordable housing in overall sales in H1 2023 shrunk to approx. 20% - an 11% decrease against the corresponding period in 2022. Likewise, in the top 7 cities, this segment's share in the overall housing supply in H1 2023 plunged to 18%, against 23% in H1 2022.

The mounting desolation is not helped by the fact that affordable home buyers have been paying almost 20% more in their EMIs over the last two years. The floating interest rates for home loans up to INR 30 lakh have jumped up from 6.7% in mid-2021 to nearly 9.15% today.

Prashant Thakur, Regional Director & Head – Research, ANAROCK Group, says, “Home loan borrowers who were paying an EMI of approx. INR 22,700 in July 2021 are now paying approx. INR 27,300 today - an increase of approx. INR 4,600 per month. This 20% increase in the EMI has resulted in a jump of approx. INR 11 lakh in the overall interest component - from approx. INR 24.5 lakh interest payable in 2021 to approx. INR 35.5 lakh today.”

The total interest payable over a 20-year tenure is now more than the principal amount. If a buyer seeks to buy a property worth <INR 40 lakh, factoring in the LTV (Loan to value) ratio, the total borrowed amount is INR 30 lakh for a tenure of 20 years. In this scenario, the buyer would have paid an EMI of INR 22,700 in 2021, when the interest rates stood at approx. 6.7%.

“At this rate, the total repayment to the bank was approx. INR 54.5 lakh, of which the interest component was approx. INR 24.5 lakh - less than the total principal amount,” says Thakur. “Today, when home loan interest rates hover at around 9.15%, this buyer's EMI is approx. INR 27,300. The total repayment to the bank at this rate is now approx. INR 65.5 lakh, of which the interest component will be approx. INR 35.5 lakh - more than the total principal amount.”

Home loans are structured such that the payments in the early years are mostly interest. When more of their payment is going to interest rather than principal, it will take longer for home buyers to build equity and own more of the home. It also means that they have a reduced opportunity to benefit from appreciation if they sell the property, because less principal has been paid off.

It is not a good sign for either individual borrowers or the broader housing market if interest on home loans exceeds principal. This would need to be addressed in the next Union Budget or even earlier via a focused policy intervention, so that the affordable housing segment is not derailed further.

Sales numbers across the top 7 cities can improve which has consistently been falling ever since the pandemic. According to latest ANAROCK Research, the total sales share of affordable homes went down to approx. 20% in H1 2023, against 31% in the corresponding period in 2022.

Of approx. 2.29 lakh units sold across the top 7 cities in H1 2023, just 20% or approx. 46,650 units were affordable homes. Back in H1 2022, of approx. 1.84 lakh units sold, over 31% or approx. 57,060 units were in the affordable category.

To fulfil its vision of Housing for All, the government must make affordable housing more viable for the maximum number of buyers. It is, after all, this segment that has the maximum demand in the country. In the current urban housing shortage of approx. 11.2 million units, affordable homes priced <INR 40 lakhs account for over 80% of the shortfall.

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