Housing market deceleration in 2025: Identifying the factors driving the price increase for homebuyers
In a concerning development for the Indian real estate market, a significant gap has emerged between rapidly rising property prices and falling sales in the country's top seven cities. This trend is primarily driven by the outpacing of buyers' affordability and demand, particularly among the middle class [1][2][3].
### Key Factors Contributing to the Gap
The surge in residential property prices, which increased by about 11% year-on-year in Q2 2025, is a key factor behind this trend. Cities like NCR saw a 27% rise, while Bangalore experienced a 12% increase [1][4]. The primary reasons for this price surge are rising construction costs, high land prices, and a growing preference for premium homes.
Simultaneously, housing sales have declined by 20% year-on-year, falling to approximately 96,300 units across the top seven cities. Mumbai and Pune experienced steep drops of 25-27%, while Hyderabad and NCR also saw double-digit declines [1][3].
The widening gap between income growth and property price increases is the core issue. Household incomes have grown at about 5.4% CAGR while property prices surged 9.3%, leading to a much higher price-to-income ratio. For example, in Mumbai, a household needs over 14 years’ worth of income to buy a home, compared to the global affordability benchmark of 5 years [2].
Another significant factor is the vanishing supply of affordable homes. The supply of affordable housing units (priced under ₹1 crore) has collapsed by 36% between 2022 and 2024, whereas luxury housing supply has more than doubled in many cities [2].
### Impact on the Real Estate Market
The affordability crisis is having a significant impact on the real estate market. Many middle-class buyers are deferring purchases or opting for smaller units as they struggle to afford premium-priced homes. This is indicative of dampened demand in the affordable and mid-segment housing markets [1][2].
The market is increasingly split between luxury developers who continue to see demand and the mass market buyers who face affordability challenges. This polarization leads to slower overall sales despite rising prices [2].
Regional variations are also evident, with Chennai bucking the overall trend by experiencing a 13% annual growth in sales and a 40% increase from the previous quarter [1][3].
The combination of geopolitical tensions, rising property prices, and poor affordability has made buyers more cautious, affecting sales volumes particularly in highly expensive markets like Mumbai and Bengaluru [3][4].
Inventory declines have been observed in some cities, but growth has been seen in others. The ultra-luxury category (above Rs 2.5 crore) has made up 19% of the supply, presenting a challenge for the middle class in terms of affordability.
In summary, the gap between soaring housing prices and falling sales in India’s top cities is caused by an affordability crisis driven by rising costs and insufficient income growth. This is forcing middle-class buyers out of the market or to compromise, creating a slow-down and segmentation in the real estate sector [1][2][3][4].
- The surge in interest rates, due to rising construction costs, high land prices, and a growing preference for premium homes, is putting a strain on the affordability of potential buyers in the Indian real estate market.
- The falling sales in the top seven cities, such as declines of 25-27% in Mumbai and Pune, can be attributed to the increasing gap between income growth and property price increases, making it difficult for many middle-class individuals to make investments in real estate.
- In the finance world, the Defi market may offer alternative investment opportunities to those struggling with the high prices and low affordability in the real estate sector.
- The economic impact of the affordability crisis in the real estate market extends beyond the industry, as it affects the purchasing power of the middle class and, consequently, the overall health and growth of the economy.
