Rising home loan rates in Mumbai, making it most expensive

According to an analysis by Knight Frank India's Affordability Index data issued on Wednesday, the city remained the most expensive housing market in India, and its Equated Monthly Instalment (EMI) to Income Ratio increased from 52% in 2021 to 55% in the first half of 2023.

With a ratio of 23%, Ahmedabad maintained its position as the most affordable housing market.

Mumbai's affordability index, presently at 55% from 93% in 2010, has steadily improved over the past ten years, especially during the epidemic when the Reserve Bank of India (RBI) lowered Repo rates to historic lows. Since January 2022, the central bank has hiked the repo rate by 250 basis points to combat growing inflation, which has had an effect on affordability and increased the EMI load by 14.4%. In three straight monetary policy meetings this year, the RBI refrained from hiking rates, which has kept home loan interest rates steady.

The Affordability Index aims to determine the percentage of household income needed to cover the EMI for a housing unit in a specific city. The values are computed using the following assumptions: a fixed housing unit area, a loan-to-value ratio of 80%, and the median price of a property in that city.

Consequently, a city with a Knight Frank Affordability Index level of 40% means that households there typically use 40% of their annual salary to pay the EMI on a property loan. The poll found that an EMI/Income ratio of more than 50% is considered expensive since at that level, banks infrequently provide mortgages.

Shishir Baijal, chairman and managing director of Knight Frank India, claims that despite the general state of the economy, demand for residences has risen to a multi-year high and for offices has remained stable.

“The mid and premium segments in the residential market have been consistently outperforming and point to a significant shift in the market’s underlying fabric. However, the 250 bps increase in policy rates has reduced affordability across markets by 2.5% on average. And, while the market has remained strong thus far, further interest rate increases could put pressure on homebuyer ability and sentiments,” stated the report.