Real Estate in India: Affordability levels
Business Standard has an interview with Ajit Dayal, Director, Quantum Mutual Fund - What happens to the index has no bearing on stocks. Here is his take on real estate:
The affordability level in our opinion has crossed the highest level witnessed in 1994-95. Affordability Index is the number of years of income you need to own a property. According to HDFC data, in 1994-95, the affordability index was close to 10 years, which meant you required 10 years of income to buy a 1000 square feet property at that time.
But the market collapsed dramatically from there. However, the boom since 2003 has pushed prices beyond 1994-95 levels. That, to us, stretches the limit of who all can afford it. Ideally, we would like it to come down to five years of income, so either the income has to double or the prices must come down to half.
Hmm. Let’s look at another source of the affordability index: Building up India: Outlook for India’s real estate markets
This one shows a bottom in 2004 - and with rising prices & home loan interest rates, we are probably back to 1997/98 levels, but NOT as high as 1994/95.
Unfortunately, there is no easy access to raw real estate price data. We can try using Bangalore as an example: say a typical 1000 square foot flat costs ~ Rs 20 lakhs, after accounting for stamp duty, registration and all other expenses. If the average annual income is Rs 2 lakhs, the affordability index (per HDFC’s formula) would be 10, and a source of concern per Mr Dayal. Again, I have no idea where to find income statistics for Bangalore, but the 2 lakh p.a. average income seems to be on the lower side to me. I agree more with the chart above, which says that housing is more affordable than it was in the mid-1990s, but is not nearly as attractive as it was in 2004, to state the obvious. 
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