Out of reach? Why buying a home in urban India feels financially draining

According to an investment banker, one should ensure that their EMI doesn't exceed 35 per cent of your monthly take-home income

Many Indians, who want to own a house in urban areas, find it difficult to stretch their pockets and buy a decent accommodation due to increasing cost of the real estate in the country. This leads to a pertinent question- Why are homes in India so expensive?

 

In a viral LinkedIn post, investment banker Sarthak Ahuja draws comparisons with global cities like New York, highlighting how a cocktail of regulatory constraints, market manipulation, and wealth concentration is keeping urban real estate prices sky-high.

 

According to Ahuja, who is a partner at Sandeep Ahuja & Co, the Price to Income (P2I) ratio in Indian cities has reached a staggering 11, implying that it would take 11 years of a person’s entire income to afford a house. For context, this is comparable to New York, one of the world’s priciest real estate markets.

 

 

"Assuming half your income goes toward expenses, it would take over 20 years of savings just to afford a home," Ahuja points out.  Also Read: How to invest in an uncertain market? Here is a defensive strategy by KIE

 

Why are prices so high?

 

Ahuja outlines three key factors

 

Low floor space index (FSI): 

Indian metros typically allow FSIs ranging from 1.3 to 3.5, limiting vertical development. In contrast, cities like New York and Singapore permit FSIs of 15 and 25, respectively, allowing developers to build taller structures and house more people in less land. This lack of vertical growth in Indian cities artificially limits supply.

 

Artificial scarcity by developers:

 

Real estate developers often release only a fraction of units in new projects initially, typically just 5 out of 100. They then hike prices by 10 per cent for the next release to test market appetite, perpetuating a cycle of scarcity and price inflation.

 

Black money and wealth concentration:

 

“It is said that less than 10 families own 20 per cent of the land in Mumbai,” notes Ahuja, underscoring how India’s wealthy elite use real estate to park black money. With much of their paper wealth locked in equity, real estate offers a tangible and tax-efficient asset class, further driving up demand and prices.

 

So, should you still buy it?

 

Ahuja recommends a conservative approach:

 

Only consider buying a home if you can pay at least 50 per cent upfront and balance 50 per cent is financed through loan.

 

Ensure your EMI doesn’t exceed 35 per cent of your monthly take-home income.

 

If that’s not feasible, he suggests renting and focusing on increasing your active income. For those set on ownership, Tier-2 cities may offer better affordability and long-term value.

 

Ahuja’s post has struck a chord with many Indians navigating the real estate labyrinth. While urban housing remains a symbol of stability and success, the systemic issues surrounding Indian real estate call for deeper regulatory reforms and more transparent practices.

 

Until then, as Ahuja succinctly puts it, “Don’t stretch yourself to buy a house just for the sake of ownership. Rent, save, invest, and grow your income first.”