Is there a housing bubble in India? Despite the excited babble, the fact is— nobody can tell for sure. The reason: the paucity of data on real-estate prices.
Economists usually conclude that real-estate prices are running ahead of fundamentals by looking at the ratio of house prices to incomes. This ratio tends to be stable in the long run, but temporary blips either above or below this trend line tell us a lot about whether the real-estate market is overheated at any particular point of time. These metrics are often tossed to and fro whenever there is discussion on the housing bubble in countries like the US, Britain and Australia.
The debate in India tends to be an empty one, in which loose talk acts as a substitute for firm numbers. India does not have any dependable data on housing prices across the country. The best that is available is stray data about some high-value transactions in certain cities. You can get a pretty good idea about what is happening in select enclaves such as Bandra or Gurgaon or Koramangala, but nothing more. This is why the impending launch of the country’s first official real estate price index, reported yesterday in this paper, is welcome. The index will be constructed by the apex National Housing Bank and will cover prices in 36 major cities within a year.
Right now, it is difficult to judge how good the index will be. All price indices face certain fundamental problems, especially when it comes to taking quality into account. The price trend in computers, for example, tell us nothing about the fact that the computing power and capabilities of an average computer keep increasing every year, making the drop in prices even more significant. In effect, you get more for less. The real-estate index is also likely to tell us very little about the improvement in the quality of housing stock.
But these are minor irritants. The more general point is that there is a depressing paucity of high-quality data on housing prices in India, and the proposed index will fill a worrisome information gap.
This index will help both housing companies as well as home buyers to decide whether the price is right to either buy or sell a house. It will also help economists get a better understanding of what’s happening in real estate, and whether prices are growing much faster than incomes. But it is our guess that the maximum advantage will be derived by the fellows to actually lend money—banks and housing finance companies.
Over the past few years, mortgage lending has been growing at breakneck speed. The Reserve Bank of India (RBI) has sent several missives to banks, warning them to be more careful when lending money for the purchase of property. Some have misunderstood this as warnings about real-estate prices in the country. RBI, like other central banks, prefers not to take a call on whether there is an asset bubble or not. Its more immediate worry is that banks are lending with inadequate information and paperwork.
A quality real estate price index covering major cities will go a long way in helping banks manage their exposures to this sector better.
They can, for example, know that crooked borrowers are overstating prices to get more money from banks. Or that prices in a particular town have increased too fast, which could lead to subsequent defaults in case prices drop.
Of course, bankers in other markets with better information have also often managed to throw big money into over-exuberant housing markets—and lose it in the inevitable chaos that comes after a bubble pops. So a real-estate index is no panacea. What cannot be denied is that it will plug an important information hole and help banks manage their risks better than they can do right now.
Do you think that an index of real-estate prices will make the sector more transparent and help consumers? We welcome your comments at firstname.lastname@example.org