Rajan is right: Salaried class can't afford a house

Only double-income households can buy flats in India's top 8 cities, except Mumbai

When Reserve Bank of India Governor Raghuram Rajan asked real estate developers to start reducing prices so that more people would be willing to buy, he was only stating the obvious. According to real estate consultants, only double-income families can afford to buy a decent-sized flat (say, a 2 BHK flat with 1,000 sq ft of super built-up area) in India’s top eight cities, except Mumbai.

Slow growth in salaries in comparison with the rise in property prices has dealt a blow to home buyers. In FY15, the average annual cost-to-company of an employee in India’s two top-paying sectors, information technology (IT) and banking, was Rs 13.3 lakh. This means a take-home salary of Rs 70,000-80,000 a month. By comparison, a 1,000 sq ft flat in India’s top seven cities would cost Rs 50 lakh-Rs 1.3 crore. At an average cost of Rs 28 lakh, flats in Ahmedabad alone are cheaper, according to data from Liases Foras.

As such, the only way out is for both husband and wife to take a home loan together. So, if the annual household income is Rs 26 lakh and the post-tax income is Rs 20 lakh, a couple can afford a loan of Rs 75 lakh and, in effect, a flat worth Rs 90 lakh, without considering registration fees and stamp duty. This amount could help one purchase a flat in all leading cities except Mumbai.

 
Pankaj Kapoor, managing director, Liases Foras, says in the past five years, prices in top markets such as Mumbai and Bengaluru have more than doubled, but salary increments haven’t matched that. This has led to steady erosion in affordability, with salaried professionals now being a minority in most housing markets. For example, in Bengaluru, IT professionals are a minority among home buyers. “In a study commissioned by one of the city’s top builders, we found IT professionals accounted for only 14 per cent of the home buyers; the rest were businessmen and self-employed,” he says.

The difference between a flat worth Rs 1.30 crore and an average annual salary of Rs 13.3 lakh is the salary for 10 years. But if an employee has to borrow from a bank or a housing finance company, she/he would be denied this amount. First, a borrower from a bank will have to raise Rs 26 lakh, 20 per cent of the property price, excluding registration or stamp duty costs. Then, if one were to borrow the remaining Rs 1.04 crore, the equated monthly instalment (EMI) for the home loan for 20 years will be Rs 1,00,362 (at a rate of 10 per cent). As both banks and housing finance companies only consider 40-50 per cent of the take-home salary, an employee’s annual take-home salary has to be at least Rs 24 lakh. In other words, the overall cost to company has to be more than Rs 30 lakh.

For one seeking to borrow even Rs 50 lakh, the average salary has to be more than Rs 1.13 lakh a month because the EMI would be Rs 48,251 (with the same rate of interest and tenure).

“Affordability is certainly a stretch. And, when that happens, end users tend to wait for prices to correct further,” said Muddasar Zaidi, national director (residential), Knight Frank. Industry veterans say for housing finance companies and banks, 90 per cent of the buyers come from the outskirts of major cities.     

For one starting early (aged 24-25), the demand for initial payment is very high. “One has to have at least 40 per cent of the apartment cost in the kitty before aspiring to buy property. This is almost impossible for people starting their careers. As a result, they only purchase properties on the outskirts. Employees, after working for 15-20 years, can afford to have a place in the city, but even that is drying up because of high prices,” says a veteran from the residential sector. For data on employees’ salaries, the entities considered were Tata Consultancy Services, Infosys, Wipro, HCL Tech, State Bank of India, Bank of Baroda, Punjab National Bank, HDFC Bank, ICICI Bank, Axis Bank, YES Bank, Kotak Mahindra Bank and HDFC. Overall, these organisations employed 1.27 million people at the end of FY15 and spent Rs 1.68 lakh crore on employee expenses in FY15. The data for HCL Tech is for the financial year ended June 30.

Between FY08 and FY15, the average salary in IT companies and banks grew at a compounded annual rate of 7.7 per cent, lower than the average consumer price inflation of 9.5 percent during the period. By contrast, salary increases were in double digits before FY08 and much higher than the underlying inflation during that period.

There has also been a sharp deceleration in fresh hiring by IT companies and banks: The headcount grew just 5.7 per cent in FY15, against average headcount growth of 12.8 per cent during FY05-FY12. This has slowed the growth in the pool of new potential home buyers.

A recent report by Knight Frank on real estate trends in January-June this year showed sales volume dropped 19 per cent and new launches a whopping 45 per cent. The consultancy projects a nine per cent drop in volumes and a 34 per cent fall in new launches. The National Capital Region (NCR) has shown a drop 68 per cent in new launches, the highest, followed by Mumbai (47 per cent). Except Pune, home sales have dropped in seven of the eight top regions (Mumbai, NCR, Bengaluru, Chennai, Hyderabad, Kolkata and Ahmedabad. Zaidi says that one of the main reasons for this slowdown in sales has been due to investors boycotting the segment. Though they are still present in some cities, with the stock markets doing rather well, investors are betting on stocks rather than real estate.

City	Property Price*	Property Cost^
	(Rs/Sq Feet)	(Rs Lakh)
Ahmedabad	2848.3	28.5
Bangalore	5221.9	52.2
Chennai	4875.3	48.8
Hyderabad	4227.5	42.3
Kolkata	4600.1	46.0
MMR	12917.8	129.2
NCR	5006.4	50.1
Pune	5563.2	55.6
White Collar Salary**		13.3

* Average price for key localities in the city            
**Annual Average cost to the company in top banks & IT companies            
^ Assuming a typical 2-BHK house with super-built area of 1000 sq feet            
Source: Liases Foras, Capitaline, Companies annual reports