How Expensive Homes Are Shrinking India's Future 

First-order effects in economics are very easy to figure out.

But the real challenge is in figuring out the second order, the third order and the nth order effects.

Take the case of data points buried on page 45 of the Reserve Bank of India’s latest Financial Stability Report.

It says that the composition of housing loans has changed dramatically over time. As of March 2014, housing loans of below ₹2.5 million accounted for more than 60% of outstanding housing loans, reflecting a stronger focus on affordable housing.

Today, higher-value loans dominate, with housing loans of ₹5 million and above accounting for close to 45% of outstanding housing loans. 

In fact, the Report on Trend and Progress of Housing in India 2025, released earlier this year, points to the same. As of March 2021, loans of ₹5 million and higher formed around 29% of the overall housing loans by value. By March 2025, this was higher than 40%. And by March 2026, it was at close to 45%.

Take a look at the following chart. It shows that the housing loans of ₹5 million to ₹10 million have been growing at the fastest pace, followed by loans of ₹10 million or more. 

Source: RBI’s Financial Stability Report, June 2026.

Now, take a look at the following chart.

Source: Report on Trend and Progress of Housing in India 2025

The housing loans given by banks and non-banking finance companies had stood at ₹10 trillion or 8% of the GDP in March 2015. By March 2025, they had jumped to ₹37.1 trillion or 11.2% of the GDP.

What do these charts tell us? The first-order effects are easy to figure out. One, India is taking on more housing loans. Two, homes have become more expensive. Or as the RBI’s Financial Stability Report euphemistically puts it: “In recent years, loan distribution has moved toward higher-value segments.”

But expensive homes and higher housing loan values lead to higher EMIs, which have other consequences as well. These are the second order, the third order and the nth order effects which most analysis generally tends to skip.

The consequences go far beyond the housing market. They include weaker consumption, lower savings, investment distortions, the disappearance of affordable housing and perhaps surprisingly, even families having fewer babies.

First, higher home prices mean higher loan values and higher EMIs. For individuals and households who haven’t seen a commensurate increase in income, this means that a higher portion of their income goes towards repaying the loan.

This has other impacts. It leads to a slowdown in consumption – something that could easily be seen in the sales of two-wheelers and small cars over the years. These sales picked up only once the government cut the goods and services tax on these vehicles, making them more affordable.

Of course, this isn’t to say that higher EMIs were the only reason for this, but they were one of the reasons. 

Second, the household debt of India has gone up over the years. It stood at 45.5% of GDP as of September 2025 against 39.2% as of March 2021. Housing loans are a part of this.

One consequence of this has been a decline in household financial savings. Higher home prices mean larger down-payments, bigger housing loans and higher EMIs, leaving households with less disposable income and, consequently, less money to save. The higher down payments eat into existing savings. 

Of course, the negative impact of the pandemic had a large role to play in the fall in financial savings as well. 

Third, in India’s largest cities, real estate has been turned into a proper financial asset. It is bought as an investment by many and not as a home to live in.

When real estate is bought as an investment or for speculative reasons, it drives up housing prices further. This makes things even more difficult for those who want to buy a house to live in.

In that sense, affordable housing in Indian cities is either disappearing or is getting built at distances farther and farther from business districts where the jobs are.

This means people have to travel longer distances and spend more time commuting to and from work. This has an impact on the overall quality of life. 

A recent report in the Business Standard using data from Magicbricks Research points out that affordable housing is rapidly disappearing from new residential launches. Homes priced below ₹7.5 million accounted for 47% of new supply in late 2021, but by early 2026 their share had shrunk to just 17%.

Meanwhile, homes priced between ₹15 million and ₹30 million almost doubled their share, from 16% to 31%, emerging as the largest segment of the residential market.

Builders seem to have more or less stopped building affordable housing because luxury projects generate higher returns. 

The fact that many of India’s rich are buying up real estate as an investment is a major reason for this.

What this also tells us is that the richie-rich feel that it makes more sense to speculate in real estate than invest in new business opportunities, which create genuine and sustainable economic activity. This is another example of the increasing financialisation of the Indian economy. 

Of course, black money has a huge role to play in this as well. 

Fourth, this is not to say that there is no genuine demand for homes to live in. Not at all. The trouble is that when it comes to this demand, India’s economic activity is concentrated in and around some of the biggest cities, thus driving up housing demand in these cities. This puts pressure on home prices as well.

Fifth, the recently released Sample Registration System Statistical Report 2024 shows that India's total fertility rate (TFR) has fallen to 1.9.

Simply put, this means that, on average, every 100 women are expected to have 190 children over the course of their child-bearing years.

This is below the replacement fertility rate of around 2.1. The replacement fertility rate is the average number of children each woman needs to have for one generation to replace the previous one, without the population either growing or shrinking.

In other words, on average, 100 women need to have around 210 children. The extra 0.1 accounts for the fact that some girls do not survive to their child-bearing years.

There are multiple reasons for this fall and multiple repercussions of it as well, and this is not the place to get into those details. But one impact of this will be that India’s demographic dividend will shrink at a faster pace than estimated earlier, implying that India will grow old before it becomes rich. 

One of the reasons for the falling TFR, at least in the cities, has to be expensive real estate. (Again, at the risk of repetition, there are many other more important reasons for this.)

When people borrow a lot of money to buy a house, they pay higher EMIs, leading to lower disposable incomes. Indeed, buying a home is probably the biggest financial commitment an urban household makes. Once a large share of income goes towards EMIs – housing and other loans – the cost of raising two or more children appears even more daunting.

This encourages families to have fewer kids. Take a look at Delhi, which has a TFR of 1.2, implying that on average 100 women in the city have 120 kids. Delhi’s TFR is significantly lower than the replacement rate.

Now, TFR rates for other Indian cities are unavailable, but educated guesses can be made. Take the case of Maharashtra. It has an urban TFR of 1.3, implying that Mumbai has a similar or probably a slightly lower TFR, which is similar to that of Delhi.

Or take the case of West Bengal, which has an urban TFR of 1.1, basically implying that Kolkata has a similar TFR.

So, Indian cities have low TFRs, and expensive real estate is one reason for the same.

None of this suggests that rising house prices are inevitable or that nothing can be done. While there are no easy fixes, a combination of better policy, more housing supply and a rethink of incentives can make homes more affordable over time.

Of course, given that we were all brought up writing exams with only right and wrong answers, solutions need to be offered.

First, India needs a proper real estate index and more publicly available data on real estate. The indices that are currently available come out with a lag and aren’t talked about enough. The government can easily get one of the many think tanks that it finances to build one.

The narrative around real estate prices in India is totally controlled by the real estate companies and the real estate consultants. Given their incentives, they keep perpetually talking about how real estate prices will only keep going up.

Also, they don’t talk about homes that have been bought as investments over the years and which continue to remain locked and are difficult to sell.

Or that anyone trying to sell a home in an old building keeps getting ignored by brokers. 

Second, India needs more cities – or that newer economic activity needs to happen beyond India’s major cities – so that real estate speculation and housing demand spread out.

Third, non-resident Indians need to be discouraged from buying homes and keeping them locked. This only benefits the builders.

Fourth, as Xi Jinping, the president of China, said in October 2017: “Houses are built to be inhabited, not for speculation.” One way to disincentivise speculation in India is to tax all kinds of income – everything from salaried income to business income to interest income to capital gains made on the sale of assets – at the same rate. Of course, this is easier said than done.

Fifth, we need to do something about all the black money floating around. I will leave it at this, given that getting into details will need the writing of a PhD thesis.

Finally, dear reader, the next time you decide to buy a house that you don't intend to live in – whether you live in India or abroad – and keep it locked in the hope of future capital gains, remember that you are doing more than just contributing to a housing shortage. You are also encouraging a model of urban development that leads to higher greenhouse gas emissions and higher pollution at multiple levels.

Of course, you may make a few bob by speculating in real estate. But in doing so, you also leave behind a world that is a little more expensive, a little more unequal and a little less sustainable for your children and grandchildren. But then that’s too far into the future to be bothered about because we are like this only.