Whalesbook
India's residential market is witnessing a pronounced shift from its saturated Tier-I metropolises to burgeoning Tier-II and Tier-III cities. This migration is fundamentally driven by affordability constraints that have rendered homes in major urban centers increasingly out of reach for a significant segment of the population. Price growth in Tier-I corridors has demonstrably outpaced income expansion between 2022 and 2024, pushing average housing prices in these markets to an average of ₹11,000 per square foot.
Smaller Cities Drive Demand
In contrast, Tier-II and Tier-III cities are exhibiting a more sustainable growth configuration. These markets offer lower entry ticket sizes and a healthier price-to-income alignment, making homeownership accessible to a broader demographic. Government initiatives like the Smart Cities Mission and the Atal Mission for Rejuvenation and Urban Transformation (AMRUT) are actively enhancing infrastructure, including new highways, expressways, and digital networks, thereby improving connectivity and economic viability. Furthermore, non-metro regions are increasingly becoming centers for formal job creation, with Tier-III cities leading this trend, accounting for 40% of employment, followed by Tier-II cities at 29%. This employment decentralization, fueled by sectors like IT, manufacturing, and logistics, is creating end-user driven demand in these emerging hubs. Projections indicate that by 2026, Tier-II cities will play a larger role, offering better affordability and faster absorption rates. The Nifty Realty Index, a benchmark for the sector, has shown volatility, trading around 709.80 as of March 13, 2026, reflecting broader market sentiment amidst these structural shifts.
Developers and Valuations
Major property companies like DLF, Lodha Developers, and Godrej Properties have varying Price-to-Earnings (P/E) ratios: DLF at 30.3x, Lodha at 25.9x, and Godrej Properties at 27.3x (March 2024 data). The overall BSE Realty index has a P/E of 34.7, suggesting the sector is valued for future growth rather than being cheap. The focus is moving away from quick price gains in big cities towards growth based on jobs, affordability, and diversification across regions from 2026 to 2028. Developers are looking more at Tier-II and Tier-III cities because land is cheaper and local demand is strong. This makes new projects there more viable. India's projected GDP growth of 7.5% for FY26 provides a supportive macro environment for this transition.
Potential Risks Ahead
Despite the positive outlook for smaller cities, risks remain. Fast price increases in these growing areas could eventually make them unaffordable, similar to what's happening in Tier-I cities. Global events, like conflicts in the Middle East, could cause inflation. This might lead the Reserve Bank of India (RBI) to keep interest rates high or delay expected cuts, hurting affordability for middle- and lower-income buyers, especially since these segments showed price stabilization in 2025. Developers could face margin pressures if rising raw material costs are not passed on. Speculative buying also drove up prices in some Tier-II cities in 2024, creating a potential risk. Delays or poor planning in infrastructure projects in these developing areas could also slow down growth. The market shift might also be more selective, with buyers prioritizing long-term financial security over quick price gains.
Analysts See Continued Growth
Analysts expect Tier-II and Tier-III cities to keep growing through 2026 and beyond, fueled by steady job creation and government support. Cushman & Wakefield predicts a moderate rise in home prices across India in 2026, with middle-segment buyers being particularly interested due to expected interest rate cuts. Government infrastructure plans like the PM Gati Shakti program are also set to boost property values and activity in these regions. While growth might slow in metro areas, the move to smaller cities should maintain overall market momentum, though buyers will likely be more selective and focused on value.