Lower home loan rates improve homebuyer affordability in seven cities in 2025: Knight Frank India report

Knight Frank India’s proprietary Affordability Index report indicates that housing affordability for homebuyers has improved in 2025, following a significant drop in interest rates since late 2024. Ahmedabad emerges as the most affordable among the top eight cities, with an index ratio of 18%, with Pune and Kolkata close behind at 22%. In Mumbai, housing affordability has significantly improved, with the EMI-to-income ratio falling to 47%. This is the first time in the city’s history that affordability has dipped below the 50% mark, suggesting a new, more sustainable level of housing affordability.

Knight Frank India’s Affordability Index, which gauges the share of household income allocated to EMIs, demonstrated steady progress across the eight major Indian cities from 2010 to 2021.

Affordability improved further during the pandemic as the Reserve Bank of India (RBI) lowered the policy repo rate to its lowest levels in a decade. However, in response to rising inflation, the RBI increased the repo rate by 250 bps over nine months starting in May 2022, causing a temporary decline in affordability during 2022. Stability in rates from February 2023 onwards supported a gradual rebound in affordability conditions.

Recently, with economic growth staying strong and inflation decreasing significantly, the RBI has cut the repo rate by 125 bps since February 2025, leading to improved affordability in most housing markets. This supportive rate environment has helped residential sales stay near the post-pandemic peak reached in 2024. The favourable interest rate situation is expected to continue into 2026, supported by the Indian economy’s steady and sustained growth momentum, according to the report.

Shishir Baijal, International Partner, Chairman and Managing Director, Knight Frank India said, “Supportive affordability is essential for sustaining homebuyer demand and sales momentum, which in turn acts as a key economic driver for the country. Over the past few years, both weighted average prices and income levels have risen, even as home loan interest rates have followed the repo rate trajectory, which has declined 125 bps this year. Among these three critical parameters influencing affordability, income levels have improved at a faster pace, and in tandem with the reducing interest rates, has strengthened overall home affordability. As income levels rise and economic growth gains traction, end-users’ financial confidence is significantly reinforced, encouraging them to undertake longer-term financial commitments towards asset creation. Given the RBI’s robust GDP growth estimate of 7.3% for FY2026 and a benign interest rate environment, affordability levels are expected to remain supportive of homebuyer demand in 2026.”

The COVID-19 pandemic acted as a catalyst for the residential real estate market, leading to a reshuffling of property prices and lending rates that greatly increased demand. This upward trend has persisted, driven by robust economic factors like effective inflation management and ongoing economic growth, which have enhanced home affordability and boosted residential sales, according to the report.

Entering 2025, concerns about excessive market heating and the potential for a sharp correction started to surface among stakeholders. However, sales activity remains near the highs achieved in 2024, and the market is on course to end the year without significant disruption, according to the report.