(UN)Affordability of homes
Gone are the days when rising realty prices were the topic of any gathering (social/official). Today's topic is all about (un)affordability of homes and how owning a home has become a distant dream for a good majority of Indian urbanites. As for those who could still afford it, it comes with a 20-25 year EMI tag, enslaving them for the rest of their working life to pay up a huge liability. This was not the case even prior to 2007, so what has changed in the recent past to make homes so unaffordable? Let us look at the details.
What is affordable?
In economic terms, one practical way of measuring affordability is the income-to-property price ratio. A look at annual wage-to-land ratio and annual wage-to-apartment price ratio reveals the underlying problem of unaffordability.
Wage-to-Land Ratio Wage-to-Apartment Ratio
Prior to 2000 2x 3-5x
Post 2000 7-9x 7-9x
Data is based on per capita wages of public sector employees (Rs.6.66Lacs p.a in 2011) and property prices of suburban areas (about 15km away from city center). Per Economic Survey of India, wages have increased at an average of 13% p.a through out the last decade, but they were far too inadequate to cover a corresponding 30% p.a increase in property prices, rendering property unaffordable to a good majority of the working population.
Property market scenario in 1970-1990s
What is affordable?
In economic terms, one practical way of measuring affordability is the income-to-property price ratio. A look at annual wage-to-land ratio and annual wage-to-apartment price ratio reveals the underlying problem of unaffordability.
Wage-to-Land Ratio Wage-to-Apartment Ratio
Prior to 2000 2x 3-5x
Post 2000 7-9x 7-9x
Data is based on per capita wages of public sector employees (Rs.6.66Lacs p.a in 2011) and property prices of suburban areas (about 15km away from city center). Per Economic Survey of India, wages have increased at an average of 13% p.a through out the last decade, but they were far too inadequate to cover a corresponding 30% p.a increase in property prices, rendering property unaffordable to a good majority of the working population.
Property market scenario in 1970-1990s
- Bank loans were rare, so unless you have the capital you cannot own a property
- Renting out was cheaper and affordable for the industrial-age urban population
- Due to prolonged years of high inflation, savings were low = low risk assets preferred
- Real estate was not attractive for investment purpose as short/long term capital gains were not commensurate with the risks involved & against other safe/liquid assets
- Sector was too informal and properties were exchanged only amongst close-knit business communities
- High leverage, rampant loans by banks and housing finance companies (per RBI, home loan portfolio of banks stood at Rs.91,000 crores as of mid-2013)
- Rising wages, more rural population moving to urban cities
- Risks of owning real estate were largely reduced as developers handled state matters
- Sector became more formalized as the number of property investors increased >10x
- IT/ITES, Auto, Banking, Healthcare sector & NRIs led to a new stream of buyers
- Unaccountable black money in the system further fueled property prices
- Very high demand in a very short span of time, leading to sky rocketing property prices resulting in "asset bubbles"
Some questions arise in our minds at this juncture. Is this the first time occurrence in India? Not really, previous asset bubble has led to down cycle with up to 50% correction between 1997-2002 (after Asian financial crisis) and a recent short correction in 2008-2009 (after Lehman financial crisis). Is this a unique phenomenon to India? No, the real estate asset bubble burst in US (due to reckless lending to sub-prime mortgages) and it has heated up well in China, Indonesia, Singapore and many other Asian economies (following QE). So, who has been profiteering from this real estate boom? Next article looks into this aspect.
Comments
Post a Comment