India’s first housing price index

India’s first housing price index
The Economic Times, July 29, 2009, Page 12

The launch of NHB Residex in India is arguably the maiden attempt by a developing country to capture the price movements in the residential properties on such a comprehensive scale, says Raj Pal

MOVEMENTS in prices of real estate, particularly residential housing, is of vital importance to the macroeconomy as well as to individual households. For most Indians, a house is the single largest component of wealth and one that has been acquired with considerable efforts and possibly, some sacrifice. Besides the obvious wealth effect and implications for households, at the macro level, housing prices have emerged as a good indicator of output, inflation and financial health, which can be useful in developing appropriate monetary policy responses and establishing financial stability framework. It has acquired added importance in the light of increase in property prices in the resent past (till 2007). In the context of the perceived overheating of the housing market during the past few years as well as the recent slump in the housing market, a number of questions arise. What are the determinants of the housing prices? Can we assess a housing bubble? How do we measure the role of liquidity in housing price increases?

Most of the developed countries and some developing countries have housing price indices. These indices have multiple uses and are utilised by planners, real estate developers, building material industries, financial institutions as well as the individual home buyers. Measuring house prices accurately over time is not simple or straightforward. The complex nature of markets for real estate is one of the major challenges towards constructing a representative house price index. The housing market is generally illiquid, the resale transactions are generally negotiated and actual transaction price is often not reported. Houses are sold infrequently and the composition and quality of houses transacted in the market changes over time.

Being a heterogeneous good in terms of qualitative and quantitative attributes — like location, covered area, quality of construction, etc, — determination of housing prices is an outcome of complex interaction of various factors. Such characteristics pose a challenge in choice of appropriate methodology, selection of sample basket of houses and collection of data for construction of a house price index.

There are numerous methods for constructing house price indexes, each with their own advantages and disadvantages. Some of these methods are based on simple summary measures (averages), such as the median price of houses transacted in a particular period. The advantage of these methods lies in their relative simplicity, both in terms of computation and the interpretation of results. However, such simple measures are likely to suffer from compositional and quality problems. Recent advances in more sophisticated methods (such as hedonic regression and repeat sales methods) have enabled price statisticians to adequately account for compositional and quality changes. However, these methods are data intensive.

Keeping in view the prominence of housing and real estate as a major area for creation of both physical and financial assets and its contribution in overall national wealth, a need was felt for setting up of a mechanism, which could track the movement of housing prices in India. Accordingly, National Housing Bank (NHB), at the behest of the Union ministry of finance undertook a pilot study to examine the feasibility of preparing such an index at the national level.

THE pilot study covered five cities, viz., Bangalore, Bhopal, Delhi, Kolkata and Mumbai. Besides, a Technical Advisory Group (TAG), with adviser, ministry of finance, as its chairman and comprising expert members was constituted to deal with all the issues relating to methodology, collection of data and also to guide the process of construction of an appropriate index. NHB launched an index for tracking prices of residential properties in India, in July 2007, as the first official housing price index of India. The index has been named NHB RESIDEX. The launch of NHB Residex in India is arguably the maiden attempt by a developing country to capture the price movements in the residential properties on such a comprehensive scale.

NHB Residexis based on actual transactions prices. Initially, it covers residential properties. Year 2001 was taken as the base year for the study and year-to-year price movement during the period 2001-2005 were captured, and subsequently updated up to 2007. NHB Residex has been expanded to cover ten more cities, viz, Ahmedabad, Faridabad, Chennai, Kochi, Hyderabad, Jaipur, Patna, Lucknow, Pune and Surat. At the time of last updation and expansion of coverage of NHB Residex to 10 more cities, the base year has been shifted from 2001 to 2007 and has been updated up to December, 2008, with two half yearly updates (Jan-June and July-Dec) during 2008.

In the compilation of NHB Residex, the cities/towns have been divided into tax/administrative zones/municipal wards or any other criteria according to availability of the data for different cities/towns. The lowest level of the stratification has been the colonies/localities. In order to ensure true representative character of the index, the housing units are grouped into three categories based on built-up area — less than 500 sq ft, 500-1,000 sq ft and more than 1,000 sq ft. Data on housing prices is being collected from 20-30 colonies for each city/ town, which are fairly distributed across all the tax/administrative zones. The sample size of price observations consists of 500-600 observations for each city/town. The index has been constructed using the weighted average methodology with Price Relative Method (Modified Laspeyre’s approach). For the present NHB Residex is proposed to be updated on half-yearly basis.

At present, NHB Residexhas covered 15 cities, in the first phase is it proposed to cover 35 cities having million plus population. The proposal is to expand NHB Residex to 63 cities, which are covered under the Jawaharlal Nehru National Urban Renewal Mission, to make it a truly national index, in a phased manner. It is envisaged to develop a residential property price index for select cities/towns and subsequently an all-India composite index by suitably combining these city/town level indices to capture the relative temporal change in the prices of houses at different levels. Index methodology would be examined periodically for further improvement.

(The author is an IES officer presently on deputation as Principal Adviser to the NHB)