Why India's Middle Class Can't Afford Homes Anymore
The Indian housing market has seen a significant rise in property prices, outpacing household income growth and making homeownership a distant dream for the middle class.
Housing MarketAffordabilityReal EstateMiddle ClassProperty PricesReal Estate NewsJun 27, 2025
In 2022, there were 3.1 lakh affordable homes (priced at ₹1 crore or below). By 2024, this number had fallen by 36% to 1.98 lakh units. While luxury housing supply surged by 48% across the top cities, including Chennai by 127%, Bengaluru by 187%, and NCR by 192%. Delhi NCR, Mumbai, and Hyderabad were the worst-hit cities in terms of affordable housing availability.
Hyderabad saw a 69% decline, Mumbai a 60% decline, NCR a 45% decline, Pune a 32% decline, Bengaluru a 33% decline, Thane a 36% decline, Navi Mumbai a 6% decline, and Chennai a 13% decline. As affordable homes disappear in the cities that need them most, Kolkata stood out with a 7% increase in affordable housing availability.
This shift is not accidental. Developers are focusing on premium projects because they lead to higher profits. With rising land, construction, and borrowing costs, building homes for the middle class has become less viable. As a result, affordable homes are being sidelined.
2 Metrics That Reveal the Crisis
1. The Price-to-Income (P/I) ratio: It tells you how many years of your annual income it would take to buy a home. India's average P/I is 11, twice the affordability benchmark (5 or less). Some major cities fare even worse:
- Mumbai Metropolitan Region: 14.3
- Delhi: 10.1
- Kolkata: 5.8
- Chennai: 5.1
- Ahmedabad: 5.1
Buying a house in the US (P/I: 3.6) or Australia (P/I: 7.6) may be more affordable than in India.
2. EMI to Income (EMI/I) ratio: This tells how much of your monthly salary goes into home loan EMIs. A ratio above 50% is considered unaffordable. As of 2024, India's average is 61%, up from 46% in 2020. This means that for many households, purchasing a home now means giving up on lifestyle and even necessities.
2 Reasons Fueling the Crisis
1. Influx of black money: It continues to distort India's housing market, primarily through the misuse of the circle rate mechanism. The loophole lies in the difference between the circle rate (government-declared minimum price per sq. ft.) and the market price (actual price set by builders, often much higher). Builders exploit this gap by registering sales at the circle rate while receiving the balance in cash. Tax impact on a ₹1 crore property:
- GST (under-construction): 12%
- Stamp duty: 7–8%
- Total tax and registration cost: ~ ₹20 lakh
At a circle rate of ₹40 lakh, tax drops to ₹8 lakh. This results in a ₹12 lakh tax saving per unit, while the remainder is settled under the table. Builders sell in bulk to HNIs and large business owners at the circle rate to recover construction costs and raise prices on the remaining units to maintain margins. Brokers make the situation worse by creating artificial scarcity to justify price hikes, making homeownership unaffordable for the middle class.
2. Low Floor Space Index (FSI): The FSI measures how much construction can happen on a given plot of land. It is tightly controlled by the government. India's low FSI is the reason why Mumbai, India's financial capital, has just 542 high-rises, while Singapore has over 2,687. FSI comparison:
- Delhi: 3.5
- Mumbai: 5
- Tokyo: 20
- Singapore: 25
- New York: 15
High FSI cities enjoy massive skyscrapers, which in turn create more housing supply with relatively controlled prices. However, a higher FSI might not be a solution. Yes, it will mean more houses, but it:
- May accelerate migration from rural areas, putting pressure on already overburdened metros.
- Cities like Mumbai are already struggling; local trains are overcrowded, and parking spaces are vanishing.
- Water supply, sewage systems, waste disposal, and roads may not support a higher population.
- Even public services like garbage collection, emergency services, and public transport could face operational breakdowns without corresponding upgrades.
Ways to Solve India's Housing Affordability Crisis
Fixing the affordability crisis in India is not an easy feat. However, with some structural reforms, change is possible. Here are 8 solutions:
1. Reform the circle rate policy: Revising the circle rate monthly instead of annually based on the maximum price cap, and introducing a peg system can help reduce the difference between the market price and the circle rate by 5-10%.
2. Establish a centralised real estate platform via RERA: The Real Estate Regulatory Authority (RERA) should serve as a unified platform for all residential property bookings and sales. Verified digital accounts should be mandatory for transactions, and sale prices should be published in real time. This would create transparency and reduce cash transactions and price manipulation.
3. Develop new cities: India has just one city for every crore of people, while countries like the US and UK have 4. State governments should propose the development of new cities to help relieve some of our overburdened cities.
4. Decentralised education and workforce: A major share (33% of the top 100) of India's universities and tech workforce (54 lakh) is concentrated in just 7 cities. Establishing top education institutions across different states can reduce overcrowding in metros.
5. Increase FSI in tier 3 cities: While increasing FSI in cities like Mumbai and Delhi also needs infrastructure updates to be useful, raising FSI in tier 3 cities can help create new housing hubs, reducing pressure on big cities. Additionally, job creation in these cities will make them more sustainable.
6. Expand government land ownership: In the US, 29% of the country's land belongs to the government. However, in India, this number is only 0.5%. We need more government-owned land to help build new cities and control urban expansion.
7. Tax vacant homes: Over 1.14 crore homes in India are unoccupied, often held for investment. A vacancy tax can push owners to rent or sell, increasing the number of homes actually available to live in.
8. Regulate NRI investments: NRIs contributed 10% of real estate investments between 2019 and 2020. Since they earn in foreign currency, this drives up prices. Caps or higher taxes on such investments can protect local buyers.
Conclusion
One thing is clear: India doesn't lack homes; it lacks accessible homes. For the average middle-class Indian, owning a home today either requires major policy reform or a financial head start that most don't have. While we wait for these reforms, personal financial preparedness is still in our control. You can start by choosing the right kind of assets. Finology 30 is a bundle of 30 strong, fundamentally sound companies that are selected after comprehensive research and analysis of their financial performance, governance standards, and future outlook. You may not be able to fix the housing market, but you can take steps to bring financial independence a little closer so you can prepare for a future where home ownership is not such a distant dream.
Frequently Asked Questions
What is the Price-to-Income (P/I) ratio and why is it important?
The Price-to-Income (P/I) ratio is a metric that shows how many years of your annual income it would take to buy a home. It's important because it helps gauge the affordability of housing. A higher P/I ratio indicates that homes are less affordable.
Why are property prices rising faster than household income in India?
Property prices are rising faster than household income due to various factors, including the influx of black money, low Floor Space Index (FSI), and developers focusing on premium projects for higher profits.
What is the Floor Space Index (FSI) and how does it affect housing prices?
The Floor Space Index (FSI) measures how much construction can happen on a given plot of land. A low FSI limits the number of floors, reducing housing supply and driving up prices. Higher FSI can increase supply and potentially lower prices.
How can the circle rate policy be reformed to improve housing affordability?
Reforming the circle rate policy involves revising it more frequently and introducing a peg system to reduce the gap between market prices and the circle rate, which can help reduce black money and make housing more affordable.
What are some solutions to the housing affordability crisis in India?
Solutions include reforming the circle rate policy, establishing a centralised real estate platform via RERA, developing new cities, decentralising education and workforce, increasing FSI in tier 3 cities, expanding government land ownership, taxing vacant homes, and regulating NRI investments.
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