Bringing significant transparency to one of the hottest sectors of the economy, India’s home loans regulator is rolling out the country’s first residential real estate price index in March.
The index, to be called the ‘NHB Residex’, will initially cover real estate prices in Mumbai, New Delhi, Bangalore, Kolkata and Bhopal. Within a year, the index will be expanded to cover 36 cities.
“Today, there is opacity,” says the regulator, S. Sridhar, chairman and managing director of National Housing Bank. “We hope to bring transparency.”
“India lacks a database on real estate prices, other developing markets have a series of housing indices,” Sridhar says. “A house price index can lead to monetary and fiscal action.”
Indeed, the index comes on the heels of what some in the government see as a worrying trend of soaring home loans, driven by a runaway rise in real estate prices rather than a surge in the number of new homes that are being built every year.
In the five years ended March 2005, home loans grew at a compound rate of 32.15% to touch Rs76,819 crore. During the same period, the number of new houses grew by 8.5%-9%, he notes.
Despite concerns about a possible real estate bubble, the government has also been treading cautiously as it remains concerned about the impact of recent bank lending rate hikes on home loans, a politically sensitive issue.
On Monday, finance minister P. Chidambaramsaid at a conference that he had asked banks—and they had agreed—not to pass on higher rates to home mortgages.
The housing regulator will maintain the index and is being advised by a committee made up of representatives from the government, its parent Reserve Bank of India, and independent experts in the field.
Real estate experts welcomed the proposed index, saying it would be a step toward empowering buyers. Home buyers “will get some general direction on where the prices are,” said Anurag Mathur, executive director- project management, at the real estate consultancy Cushman & Wakefield.
Having an index could also help give credibility to the market because recorded real estate transactions in the country are widely believed to under-report the actual amounts that change hands, because of cash being paid to the sellers.
“Black money does create a credibility issue,” said Revathy Ashok, director (finance and administration) at TSI Ventures, a real-estate joint venture between private equity firm ICICI Ventures and the large US real estate company, Tishman Speyer. An index created by a government-backed entity would be more credible than if the index was created by the real-estate industry, she added.
Even if a real-estate index can’t match more popular and widely-used stock market indices in terms of credibility, it will still give users a sense of what’s happening in the market, said Saumitra Choudhuri, economic advisor at the credit rating agency, ICRA, and a member of the Prime Minister’s Economic Advisory Council.
Not all real estate executives think the index will be too useful to the industry or to buyers.
A housing project of a large real-estate firm gets sold over six to eight months during which the company gets a chance to gauge what the market is willing to pay, said this executive, who did not want to be named. With sales staggered over such a long period, the prices are typically determined by what the market is willing to bear he added. An index wouldn’t make a big difference to the average buyer though policy makers are likely to find an index more useful, he added. The index “gives us a relative value measure and prevents information arbitrage”, says NHB’s Sridhar. “Creation of an index can help in real estate price discovery.”