Factors determining regional housing prices: evidence from major cities in India

Abstract

Using quarterly data (2010Q1–2013Q4), the study makes an initial attempt to explain the housing prices for 15 major cities of different regions in India. The overall result demonstrates that there is a dominance of fundamental factors over the non-fundamental factor (speculative factors) in explaining the regional housing prices. Further, among the fundamental factors, it is observed that the share price index, non-food bank credit and foreign direct investment positively explain the housing prices, while inflation rate and a partial measure of wealth (i.e. market capitalisation) negatively explain the same. The price of gold, real effective exchange rate and net portfolio investments don’t have any influence on the housing prices. This could to some extent signify a lack of market integration among various asset markets in the Indian situation. This might also be the reason for the lesser role of speculative factors in the Indian housing market.

Keywords:

• house price
• speculation
• bank credit
• FDI
• stock and gold prices

JEL Classifications:

• E3
• E4
• E5
• G1

Acknowledgements

We acknowledge the constructive comments made by the anonymous referees of the journal. We are also very much thankful to our colleague Anoop Kumar Bhandari, Assistant Professor, IIT Madras, for his valuable suggestions on the initial draft of the paper.

Notes

1. House price speculation is often defined as the increases in house prices which are caused due to rising purchase and sales of houses, primarily motivated by the expectation of a real increase in the price of houses in the future (Hu, Su, Jin, & Jiang, 2006). This behaviour mostly brings the bubbles in housing markets.

2. It is difficult to collect the information on the levels of credit extended in a locality owing to an expansionary monetary policy measure of the central bank. It is also difficult to obtain the data on credit extended by the banks to the housing sector in different regions for a developing economy.

3. We describe the term ‘bubble’ to describe upward movement in housing price as there have been lots more variations in housing prices in recent years than prior to the 1990s across the cities or regions. The Indian housing market is quite recent and emerging as there was no market for housing before implementation of the new liberal market policies, unlike the matured markets in the advanced economies.

4. China’s urban house price is not only decided by market fundamentals, but also largely influenced by the real estate policy of the government. This is quite different from other countries where right to land ownership is allowed with the private sector (Yu, 2010).

5. The housing bubble can be driven by homebuyers who are willing to pay inflated prices for houses today because they expect unrealistically high housing appreciation in the future. Stiglitz (1990) defines asset bubbles as: if the reason that the price is high today is only because investors believe that the selling price is high tomorrow – when ‘fundamental’ factors do not seem to justify such a price – then a bubble exists.

6. We have considered the real Treasury bill rate on 91 days government securities as a proxy for the market rate of interest in the absence of any other longer term rate of interest for our full sample period.

7. The result derived from the second (ratio) model does not change the parameters corresponding to other key variables like share prices, even if we drop either market capitalisation-income ratio or portfolio investment-to-GDP ratio.