The Reserve Bank of India’s (RBI) latest Residential Asset Price Monitoring Survey (RAPMS) reveals an alarming trend in the housing sector. According to the quarterly report, housing affordability in India has been on a decline over the past four years. This can be attributed to the hike in the House Price to Income (HPTI) ratio. Furthermore, the survey highlights an increasing trend in loan disbursal by banks and housing finance companies against the value of housing property.
Understanding HPTI Ratio
Essentially, the HPTI ratio refers to the relationship between the average household income and housing prices. It’s a critical tool used by lenders to gauge the affordability of a residential property. An increase in the HPTI ratio is indicative of home buyers’ decreasing purchasing power. The RAPMS data shows the HPTI ratio escalating from 56.1 to 61.5 between 2015 and 2019. Bhubaneswar emerges as the most affordable city with an HPTI of 54.3. Conversely, Mumbai remains the least affordable city, boasting an HPTI of 74.4.
Role of Loan To Value (LTV) Ratio
The LTV ratio represents the amount of loan a lender is prepared to give as a percentage of the property’s value. Its role has become increasingly significant in recent years with banks becoming more risk-tolerant in housing loans. The RAPMS report cites the LTV ratio rising from 67.7% to 69.6% between the years 2015 to 2019. This implies that lenders are more willing to offer higher loans against the value of the property.
Significance of Loan To Income (LTI) Ratio
Banks use the Loan to Income (LTI) ratio to determine an applicant’s capacity to manage additional debt. This ratio is calculated by dividing the total monthly debt obligations, such as credit card payments, auto loans, student loans, etc., by net monthly income. A lower LTI value signifies a healthy balance between debt and income. However, according to the RAPMS survey, there has been a decrease in housing affordability as the LTI ratio has risen from 3 in March 2015 to 3.4 in March 2019.
Summary of Housing Affordability Trends
| Financial Indicators | 2015 | 2019 |
|---|---|---|
| HPTI Ratio | 56.1 | 61.5 |
| LTV Ratio | 67.7% | 69.6% |
| LTI Ratio | 3 | 3.4 |
Implications for Homebuyers and Lenders
The worsening housing affordability, as indicated by rising HPTI, LTV, and LTI ratios, suggests that home buyers need to shoulder higher financial burdens to purchase a property. Moreover, the increasing LTV ratio shows that banks are also taking more substantial risks in this scenario. These trends urge for careful evaluation and planning by both potential homebuyers and lenders. It’s crucial for buyers to thoroughly assess their borrowing capacity and repayment capability. Similarly, lenders must carefully scrutinize the loan applications for any potential risk of default.
