Whalesbook
The Bifurcation of Tier-II Demand
Sales volumes across 15 key tier-II Indian cities contracted by 10% in 2025, reaching 1,56,181 units. This volume decline, however, was counterbalanced by sales value remaining stable at ₹1.48 lakh crore for the year. This divergence indicates a pronounced market stratification, where the shrinking supply of more affordable housing is being offset by increased demand and transaction values in the higher-priced segments. The dynamics observed in these secondary urban centers increasingly resemble those of established tier-I metropolitan areas, which have experienced similar trends of declining unit sales alongside rising property values for several years.
The Shrinking Affordable Core
The primary driver behind the volume dip is the diminishing availability of homes priced below ₹1 crore. This segment, traditionally the bedrock of demand in tier-II cities, has been severely impacted by escalating construction expenses. Over the past five years, construction costs have surged by approximately 40% [4, 17]. This rise is attributed to significant increases in labor costs, which have climbed by as much as 150% since 2019, alongside a 30-57% jump in steel and cement prices [4, 17]. Consequently, the share of affordable housing in new launches has plummeted from 40% in 2019 to just 12% by the first half of 2025 [4, 17]. This cost pressure has squeezed developers, forcing them to either absorb higher expenses or pass them on, thereby reducing the viability of projects in the sub-₹1 crore bracket [17].
Premiumization Takes Hold
Concurrently, the market for homes priced above ₹1 crore has shown resilience and growth. Sales in this premium segment increased by 9% in 2025, with its share of the total market expanding to 28% from 23% in the preceding year [13, 16, 24]. This trend is fueled by a confluence of factors, including rising household incomes, evolving buyer aspirations prioritizing lifestyle and larger living spaces, and improved infrastructure in tier-II cities [Source A, 21]. Experts note that buyers are increasingly focusing on quality of life, community living, and larger homes, even at a higher price point [Source A]. This aligns with broader national trends, where the INR 20-50 million category has seen significant sales growth, and homes above INR 10 million now constitute nearly half of total sales in major Indian cities [36].
Regional Divergence and Tier-I Mirroring
While the overall trend points to premiumization, regional performance varied significantly. Cities like Visakhapatnam and Bhubaneswar witnessed steep declines of 38% and 25% respectively, while Mohali (+34%) and Lucknow (+6%) showed growth [13, 16]. Notably, Ahmedabad is now being considered a tier-I city due to its development scale and demand depth [13, 15]. The performance of tier-II cities now closely mirrors that of tier-I markets, where sales value has reached record highs driven by premium offerings despite unit volume declines [30, 38]. For instance, in the first half of 2025, tier-I cities recorded ₹3.6 lakh crore in sales, a 9% increase from the previous year, with a 14% rise in average ticket size [30].
The Bear Case
The current market trajectory presents several risks. The significant drop in affordable housing supply and the increasing price points could exacerbate affordability challenges, potentially impacting mid-income housing as well [15]. The reliance on a niche, higher-income demographic for sales growth makes the premium segment more susceptible to economic downturns or shifts in discretionary spending. Furthermore, as tier-II cities mature and attract more development, there is a risk of oversupply in the premium segment if new launches outpace the demand from this specialized buyer base. P E Analytics Ltd, the parent of PropEquity, operates with a market capitalization of approximately ₹209 crore and a TTM P/E ratio around 16-17x [6, 22, 32], indicating it is valued within the SME segment, and its performance is tied to the broader real estate data analytics market. However, the core risk lies not with the data provider but within the market dynamics it reports: a market increasingly bifurcated and potentially facing future affordability corrections. The historical price appreciation in tier-II cities, sometimes exceeding 65% in a year for new launches [20, 26], signals a rapid rise that may outpace sustainable income growth for many segments of the population.
Future Outlook
Looking ahead to 2026, the Indian real estate sector, including tier-II cities, is projected to see steady, broad-based growth [5, 7]. Factors such as improving housing finance access, sustained end-user demand, and government infrastructure development initiatives are expected to support the market [5, 21]. The demand for luxury and high-end housing is anticipated to continue, driven by rising incomes and NRI participation [5]. However, this growth will likely be more disciplined, with a continued emphasis on execution strength and capital prudence [41]. The evolving buyer preferences are shifting towards dependable long-term value, durability, and maintenance, moving beyond just visible premium finishes [40]. The government's budget allocations towards infrastructure are expected to further boost demand and employment in tier-II and tier-III cities, positioning them as key growth engines for the future [42].