The Unaffordable Dream: Exploring Why Flats in India Are So Expensive and When to Consider Buying

Buying a home is a dream cherished by many in India, but the reality of skyrocketing property prices makes this aspiration increasingly out of reach for the average citizen. Sarthak Ahuja, an investment banker, recently shed light on the complex factors driving the surge in housing costs and provided valuable insights on when potential buyers should consider making a purchase.

Introduction to India's Real Estate Landscape

India's real estate market has been experiencing significant growth, but this growth has been accompanied by unprecedented price increases. The demand for luxury and ultra-luxury homes has particularly contributed to the hike in housing prices. Cities like Delhi-NCR, Bengaluru, and Ahmedabad have seen notable year-on-year increases, with Delhi-NCR recording the highest rise at 31%[2].

However, beneath the surface of this booming market lies a complex web of factors that are making home ownership an unattainable luxury for many Indians. Low-income growth, coupled with rising property values, has pushed the Price-to-Income (P2I) ratio to alarming levels. For instance, in major urban areas, the P2I ratio averages around 11, meaning that one would need to dedicate 11 years of full income just to afford a home[1][3].

Key Factors Behind the High Property Prices

Several key factors contribute to the escalating costs of flats in India:

1. Low Floor Space Index (FSI)

• Impact on Land Use: India's restrictive Floor Space Index, ranging from 1.3 to 3.5 in most metropolitan areas, severely limits vertical construction and efficient land use. This contrasts sharply with developed countries where FSIs are notably higher, such as the US (average FSI around 15) and Singapore (FSI of 25)[1][3].
• Consequences: The result is a greater demand for land, which contributes to higher property prices.

2. Price Manipulation by Developers

• Artificial Scarcity: Private developers often manipulate supply by releasing only a fraction of available units for sale, thereby creating artificial scarcity. This tactic allows them to raise prices with each new release[1][3].
• Consumer Impact: Such strategies leave genuine buyers struggling as prices are driven beyond market value.

3. Unaccounted Wealth in Real Estate

• Black Money Influence: Real estate in India also serves as a haven for unaccounted wealth. A small number of affluent families own large portions of land, especially in cities like Mumbai. This not only distorts market dynamics but also reduces available inventory for genuine buyers[1][3].

The Luxury Housing Boom

Despite the rising costs, India's luxury housing market is experiencing remarkable growth. Sales of high-end apartments priced between Rs 2 crore and Rs 5 crore have increased dramatically, reflecting a growing preference for luxury living among India's high-net-worth individuals (HNIs) and ultra-high-net-worth individuals (UHNIs)[5]. Key factors contributing to this trend include:

• Improved Infrastructure: Investments in modern amenities and infrastructure, such as metro rail systems and smart city initiatives, enhance property values and appeal[4].
• Proximity to Landmarks: Properties near significant business zones or cultural landmarks command higher prices due to their strategic advantages[4].

Advice for Aspiring Homeowners

Sarthak Ahuja offers practical advice for those contemplating home ownership in India:

• Financial Readiness: It's crucial to buy a house only when you can afford at least 50% of the price upfront, ensuring that the rest can be financed through a loan. This helps maintain financial stability[3].
• Sustainable EMIs: Ensure that your Equated Monthly Installments (EMIs) do not exceed 35% of your net monthly income to avoid financial strain[3].
• Exploring Alternatives: Consider renting over buying if affordability is a concern. Additionally, exploring Tier-2 cities, where property is more affordable, might offer better long-term value and appreciation[3].

Conclusion

India's real estate market presents both opportunities and challenges. While luxury housing continues to attract investors due to its growth potential, the average citizen faces significant barriers to home ownership. Understanding the factors driving price increases and taking a cautious approach are key for those aspiring to purchase a home in this dynamic market.

In the face of these challenges, it's essential for potential buyers to remain informed about market trends and financial planning strategies to navigate the complex landscape of Indian real estate effectively.