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House Prices Touch Skyline Again…..
| June 30, 2007 |  (Be the first to rate this story!) Loading ... |
If you have recently bought a house in any of the metros, you are certainly one of the lucky chaps. With the increasing property prices in India and interest rates on home loans touching the skyline, any individual will think thrice before buying a house.
Taking a look at the home buying scenario in 2004, the price of a house was equal to 4.4 years of the individual’s income. Contrary to this, it will require over five years of income to buy the same house.
Then, there are Equated Monthly Installments (EMIs) that forces the buyer to break the bank. More than property prices, it’s the increase in EMIs that have made the houses unaffordable.
|
Year
|
Annual income (Rs Lakh)
|
Price of house (Rs Lakh)
|
Buying Power
|
Interest Rate (%)
|
EMI (In Rs)
|
EMI as % of monthly Income
|
|
1995
|
1.2
|
26
|
21.7
|
18.00
|
40,126
|
401.2
|
|
1996
|
1.4
|
21
|
15.4
|
19.00
|
34,034
|
300.3
|
|
1997
|
1.5
|
17
|
11.4
|
17.00
|
24,936
|
200.8
|
|
1998
|
1.6
|
14
|
8.6
|
15.50
|
18,954
|
139.5
|
|
1999
|
1.8
|
12
|
6.6
|
14.00
|
14,922
|
98.3
|
|
2000
|
2.0
|
12
|
5.9
|
12.50
|
13,634
|
80.5
|
|
2001
|
2.3
|
12
|
5.3
|
11.25
|
12,591
|
66.8
|
|
2002
|
2.6
|
12
|
4.9
|
10.00
|
11,580
|
56.7
|
|
2003
|
2.7
|
13
|
4.8
|
8.50
|
11,282
|
49.7
|
|
2004
|
3.2
|
14
|
4.4
|
7.50
|
11,278
|
42.1
|
|
2005
|
3.8
|
18
|
4.7
|
7.25
|
14,227
|
44.6
|
|
2006
|
5.0
|
25
|
5.0
|
9.00
|
22,493
|
53.9
|
|
2007
|
5.3
|
27
|
5.1
|
12.00
|
29,729
|
67.3
|
A quick glance at the accompanying table — data for which was provided by India’s largest housing finance company HDFC — will make the prospective home-buyer’s plight clear. But first, a brief explanation.The price of the house is based on rates prevailing for a two-bedroom apartment in a metro city’s suburb. In 1995, almost 35% of home loan applicants to HDFC had an annual income of around Rs 1.20 lakh. Since most of the applicants came from that bracket, that’s the figure that has been assumed as the buyer’s income.
So in 1995, if a house was priced at Rs 26 lakh, it would take someone with an annual income of Rs 1.20 lakh almost 22 years’ worth of income to buy it. Things got better thereafter for buyers. House prices dropped, incomes rose.
The average salary increase from 1995 to 2007 came out to 13.2% annually, based on data across a cross-section of industries. So, a person who earned Rs 1.20 lakh a year in 1995 would be earning Rs 1.36 lakh in 1996, Rs 1.49 lakh in 1997 and so on.
If you look at the table, you’ll notice that houses rapidly became more affordable. In fact, the best year for the home buyer was 2004, when the price-to-income multiple touched an all-time low of 4.4. With EMI (assuming a 100% loan on the two-bedroom house in the metro suburb) as a percentage of income also at a record low of 42, millions fulfilled the great Indian middleclass dream of owning their own home.
Then, the tide began to turn. House prices rose faster than incomes, and interest rates shot up even faster. The latter is particularly worrying, because banks usually ensure that a loan’s EMI does not exceed 40% of the borrower’s monthly income.
In some cases, this can go as high as 50%. A senior banker points out that with EMI now touching 67% of the borrower’s monthly income, banks will simply not loan him enough money to complete the purchase.
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