Unpacking the Impact: Rising Home Loan Rates and EMI Affordability in 2023

Understanding the Affordability Index and its Significance

In a latest news article, it’s been highlighted that elevated interest rates on home loans are affecting the affordability of residential residences in India during the first half of this year. The ‘affordability index,’ a release by Knight Frank India, reveals the challenges posed by these interest rate hikes on people’s potential to find the money for homes. As I delved into the details of this document, I found it to be an eye-opening reflection of the contemporary financial landscape. We had also published an article on the intricate relationship between interest rates and other economic variables in our previous post

Analyzing the Impact: Home Loan Rate Hikes and Affordability Challenges

Knight Frank India, a respected real estate consultancy, has introduced an index that assesses the affordability of residential homes within the eight fundamental towns of Mumbai, Ahmedabad, Delhi-NCR, Kolkata, Bengaluru, Chennai, Pune, and Hyderabad. The index gauges affordability via analyzing the equated month-to-month installment (EMI)-to-earnings ratio of the common family. This ratio portrays the part of a household’s monthly earnings required to cowl the EMI of a residential unit.

Affordability = EMI/Income

The record clarifies that a town with a ratio of forty percent signifies that households want to allocate 40 percentage in their month-to-month earnings to control the EMI for a home loan. If this ratio exceeds 50 percent, it enters an unaffordable quarter, frequently surpassing banks’ lending thresholds. The findings from this evaluation display that the latest growth in domestic mortgage fees has adversely impacted affordability throughout various markets in 2023. Appreciably, even as Ahmedabad boasts the maximum low priced market with a 23 percentage ratio, Mumbai faces unaffordability with a 55 percentage ratio. Following Ahmedabad carefully are Pune and Kolkata, every with a ratio of 26 percent, even as Bengaluru and Chennai score 28 percentage every. Conversely, Delhi-NCR and Hyderabad rank last alongside Mumbai, with ratios of 30 percentage and 31 percentage, respectively.

Simply put, summarized in the below table

CityAffordability Ratio
Affordability Ratios across cosmo cities

A noteworthy insight from the report highlights the impact of the Reserve Bank of India’s (RBI) policy decisions. The period from 2010 to 2021 witnessed consistent improvements in affordability across all eight cities due to the RBI’s repo rate cuts, especially during the pandemic. However, the subsequent decision to increase the repo rate as a measure against inflation has resulted in an average decrease of 2.5 percent in affordability across these cities. Consequently, the EMI burden for residents has surged by an average of 14.4 percent.

As we navigate those economic fluctuations, it’s miles essential for us to stay knowledgeable about the variables that at once effect our each day lives. Information the intricate courting between hobby charges, affordability, and the actual estate marketplace can empower us to make informed decisions. Via looking for records from legitimate sources and staying up to date on economic news platforms, monetary reports, and insightful articles, we will equip ourselves with the expertise had to navigate these economic adjustments accurately. This proactive approach will allow us to make prudent economic choices in an ever-evolving economic scenario.

You can take a look at the following link where we talked about interest rates and its impact on inflation, economic growth etc 


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