Expected Interest Rate Cuts to Boost Home Affordability in India: JLL Analysis
India's residential real estate market is gearing up for an affordability boost in 2025, thanks to projected interest rate cuts, according to JLL's latest report.
Real EstateInterest RatesJllHome AffordabilityHousing MarketReal Estate MaharashtraNov 26, 2024
Mumbai and Pune are set to approach optimal affordability levels by 2025, while Kolkata is expected to maintain its status as the most affordable market, potentially setting new peaks. The residential market is currently experiencing a robust bull run, driven by evolving homeownership dynamics. This momentum has led to consecutive peaks in sales and an acceleration in project launches. Residential sales are projected to reach an impressive 305,000-310,000 units in 2024, with further growth expected in 2025, potentially hitting a new peak at 340,000-350,000 units.
A key factor in this positive outlook is the anticipated shift in monetary policy. The Reserve Bank of India (RBI) has recently shifted its stance from withdrawal of accommodation to neutral, setting the stage for a potential rate cut cycle. While a rate cut by the end of 2024 may not materialize, a total of 50 basis points in repo rate reduction and a complementary interest rate decline over the next 12 months is a possibility. These cuts are expected to act as a catalyst, improving affordability levels and supporting the continued momentum in the residential market.
Mumbai and Pune are projected to approach near-peak affordability levels by 2025, while Kolkata is expected to maintain its status as India’s most affordable market among major cities, potentially hitting new peaks. Meanwhile, Delhi NCR and southern markets like Bengaluru, Hyderabad, and Chennai are likely to see improved affordability levels on a YoY basis, though remaining below their peak values.
While domestic economic forecasts suggest some softness in growth, India is still projected to be the best-performing large economy globally, supporting household income growth. JLL’s HPAI shows that while 2021 saw peak affordability across all markets, rising prices and sticky interest rates caused affordability levels to dip through 2022 and 2023. The anticipated interest rate reduction, combined with moderate price growth and sustained income increases, are expected to create a conducive environment for home purchases over the next 12-18 months, with affordability levels set to improve to their best since 2022 for all cities except Bengaluru and Delhi NCR. Even in these two cities, affordability will be better than 2023 levels, maintaining buoyancy in homebuyer behavior and ensuring a long and resilient runway for market activity, even with continued price growth going forward.
With 2011 as the base year, Hyderabad leads in price growth with a 132% increase, followed by Bengaluru at 116% and Delhi NCR at 98%. On the income front, Mumbai has seen the highest growth at 189%, with Pune and Hyderabad following at 173% and 163%, respectively, over the same period. The residential real estate market is experiencing a robust bull run, driven by shifting homeownership dynamics and resilient demand despite double-digit price growth and elevated interest rates. The market's upward trajectory has continued, seemingly unaffected by the rise in interest rates. Looking ahead, the combination of healthy income growth, potential interest rate reductions, and moderating price growth is expected to improve affordability levels over the next 12 months, paving the way for sustained market activity and continued strong performance in India's residential real estate sector in the medium term.
JLL's HPAI serves as a vital tool for aligning homebuyers' affordability with suitable product offerings. The report emphasizes that actively managing affordability levels through policy interventions and improvements in household incomes will be key to sustaining demand elasticity, even in a positive price growth environment.
Frequently Asked Questions
What is the Home Purchase Affordability Index (HPAI)?
The Home Purchase Affordability Index (HPAI) is a tool developed by JLL to measure the affordability of homes in different markets. It takes into account factors such as income growth, price growth, and interest rates to provide a comprehensive view of the housing market's affordability.
Which cities are expected to see the most significant improvement in home affordability?
Mumbai, Pune, and Kolkata are expected to see the most significant improvement in home affordability by 2025. Mumbai and Pune are projected to approach near-peak levels, while Kolkata is set to maintain its status as the most affordable market, potentially hitting new peaks.
Why is the Reserve Bank of India (RBI) expected to cut interest rates?
The RBI is expected to cut interest rates to support economic growth and improve affordability in the housing market. The shift from a withdrawal of accommodation to a neutral stance suggests that a rate cut cycle may be on the horizon.
What impact will the interest rate cuts have on the housing market?
Interest rate cuts are expected to act as a catalyst, improving affordability levels and supporting the continued momentum in the residential market. This will create a conducive environment for home purchases, leading to sustained market activity and strong performance in the medium term.
How has the residential real estate market performed in recent years?
The residential real estate market has experienced a robust bull run, driven by evolving homeownership dynamics and resilient demand. Despite double-digit price growth and elevated interest rates, the market has continued to show strong performance, with consecutive peaks in sales and an acceleration in project launches.
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