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Housing Affordability Improves Across India
Knight Frank India's new Affordability Index report paints a bright picture for Indian homebuyers in 2025, signaling a significant improvement in housing affordability. This positive trend is largely attributed to a substantial drop in home loan interest rates implemented since late 2024. The report highlights Ahmedabad as the most affordable city among the top eight, boasting an impressive affordability ratio of 18%. Pune and Kolkata follow closely, both at 22%.
In a historic milestone, Mumbai has seen its housing affordability cross a crucial threshold. The city's EMI-to-income ratio has declined to 47%, marking the first time it has fallen below the 50% benchmark. This development suggests a new, more sustainable level of affordability for properties in India's financial capital.
The Core Issue
The Knight Frank India Affordability Index measures the proportion of household income dedicated to Equated Monthly Installments (EMIs) for home loans. Historically, the index showed steady progress across eight major Indian cities from 2010 to 2021. Affordability received a boost during the COVID-19 pandemic as the Reserve Bank of India (RBI) reduced its policy repo rate to decade-low levels.
However, rising inflation prompted the RBI to increase the repo rate by 250 basis points (bps) over nine months starting May 2022, leading to a temporary dip in affordability during 2022. Rates stabilized from February 2023 onwards, allowing for a gradual recovery in housing affordability conditions.
Financial Implications
The recent period has seen the RBI cut the repo rate by 125 bps since February 2025, responding to strong economic growth and significantly reduced inflation. This supportive rate environment has been instrumental in keeping residential sales figures near the post-pandemic peak achieved in 2024. A favorable interest rate scenario, coupled with rising incomes, is crucial for sustaining homebuyer demand and overall market momentum.
Official Statements and Responses
Shishir Baijal, International Partner, Chairman and Managing Director at Knight Frank India, emphasized the importance of supportive affordability. He noted that strong income growth, combined with declining interest rates, has significantly strengthened overall home affordability. Mr. Baijal stated that rising income levels and economic growth reinforce homebuyers' financial confidence, encouraging them to make long-term asset creation commitments.
Future Outlook
The positive trajectory is expected to continue into 2026. The report projects that affordability levels will remain supportive of homebuyer demand throughout the year. This optimism is underpinned by the Indian economy's steady and sustained growth momentum, with the RBI estimating a GDP growth of 7.3% for FY2026. A benign interest rate environment is anticipated to persist.
Market Reaction
Residential property sales have remained robust, staying near the post-pandemic highs recorded in 2024. Despite initial concerns about market overheating entering 2025, sales activity has shown resilience. The market appears on track to conclude 2025 without significant disruptions, a testament to the underlying demand supported by affordability.
Impact
The improved housing affordability is a significant positive for the Indian economy. It directly benefits homebuyers by making property ownership more accessible. This, in turn, stimulates demand in the residential real estate sector, which has ripple effects on allied industries such as construction, cement, steel, and home furnishings. Banks and financial institutions also benefit from increased mortgage lending. The overall boost to consumer confidence and asset creation can contribute to broader economic growth.
Impact Rating: 8/10
Difficult Terms Explained
- EMI: Equated Monthly Installment, a fixed amount paid by a borrower for an installment loan, typically on a monthly basis.
- Affordability Index: A measure that indicates how affordable housing is for the average household, often calculated as the percentage of income required to service a home loan EMI.
- Repo Rate: The interest rate at which the Reserve Bank of India (RBI) lends money to commercial banks. Changes in the repo rate influence lending rates across the economy.
- Basis Points (bps): A unit of measure used in finance to describe a small change in a percentage. 100 bps equals 1%.
- GDP: Gross Domestic Product, the total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period.