The housing sector is seeing a distinct trend shift. Tier-2 and Tier-3 are leading in the consumption category in many ways. Another feat is that India’s next phase of housing growth is coming from the smaller cities, as soaring property prices in large urban centres begin to strain affordability and temper demand. This is as per a report by real estate consultant Square Yards, quoted by PTI.
According to Square Yards, the tier-2 and tier-3 cities are likely to drive the next cycle of residential growth, as housing in major metro cities has become increasingly expensive following a sharp rally after the pandemic.
The firm’s report, India’s Next Real Estate Growth Cycle: The Rise of Tier-2 and Tier-3 Cities, noted that home prices surged significantly between 2022 and 2024, pushing several tier-1 markets into what it described as a “too-premium-to-afford” phase. “India’s residential market is entering a structurally distinct phase,” the report said. “The post-pandemic premium cycle that powered accelerated price appreciation across metro markets is now showing signs of stabilisation.”
Affordability pressures weigh on metro markets
The slowdown in large cities comes as housing prices have grown faster than incomes in many key corridors, compressing affordability and cooling incremental demand for high-ticket homes, according to Square Yards.
Limited supply of affordable and mid-income housing in the country’s top seven property markets, Mumbai Metropolitan Region, Pune, Bengaluru, Delhi-NCR, Hyderabad, Chennai and Kolkata, has compounded the problem.
According to a report by Nuvama Institutional Equities, India’s residential sector showed signs of losing momentum in calendar year 2025, as affordability pressures began to weigh on demand. Nuvama said the December quarter of 2025 recorded the first year-on-year decline in quarterly housing sales value in four years, falling 6%, while full-year sales value growth slowed to 4%. Housing sales volumes also dropped 6% during the year.
Prices, however, continued to rise across major markets, increasing 5–13% year-on-year in the top seven cities, further tightening affordability for potential buyers, the brokerage noted.
Smaller cities emerge as the next demand centres
Against this backdrop, emerging urban centres are increasingly seen as the next engines of housing demand. According to Square Yards, these cities offer lower entry ticket sizes and better price-to-income alignment, making home ownership more accessible to end-users compared with expensive metro markets.
Employment expansion outside traditional metropolitan hubs is also broadening the residential demand base, the firm said, with housing demand in smaller cities largely driven by end-users rather than speculative investors. “The 2026–2028 residential cycle is unlikely to mirror the speculative premium surge of the recent past,” the report said. “Instead, it is poised to be employment-backed, affordability-aligned and geographically diversified.”
Cities such as Bhubaneswar, Cuttack, Erode, Puri, Varanasi and Visakhapatnam could lead the next phase of growth, according to the report.
Housing cycle enters a new phase
Industry analysts say the housing cycle is now entering its middle stage, where growth will likely become more uneven across markets. Nuvama said sales volumes could remain muted in the near term as affordability challenges persist and the supply of mid-income housing remains limited.
At the same time, developers may increasingly shift their focus away from luxury-heavy portfolios toward mid-income and premium housing, while keeping ticket sizes in check to revive demand. Tanuj Shori, founder and chief executive of Square Yards, said unlocking new growth territories will be critical for the real estate sector, which is among India’s largest employment generators. “With tier-1 cities largely saturated and affordability under visible strain, exploring new growth corridors is essential to sustain large-scale activity in the sector,” Shori said.