New Delhi: The increase in housing prices in India over the past decades has not been owing to inflation, but because of issues in the real estate sector such as “lack of credible and rigorous land use planning and implementation, leading to constrained and unpredictable supply of land”, claims a paper by New Delhi-based policy think tank, the Centre for Social and Economic Progress (CSEP).
“This, in turn, gives rise to a less-than-competitive industry structure, incentivising and enabling developers/suppliers to keep prices high,” the paper adds.
The other reason for the hike in housing prices is the presence of a “shadow economy, or unaccounted income”. “It is commonly asserted that real estate offers a safe haven to store unaccounted income,” claims the paper.
Titled, ‘House Prices in India: How High, and for How Long?’, the paper published last month and authored by the CSEP’s Shishir Gupta, Nandini Agnihotri and Annie George, is based on a dataset of house prices from the past 30 years.
House prices have appreciated by 9.3 percent on an annual basis between 1991-2021, the paper points out. On a price-to-income ratio (PTI) of 11, this makes housing in India twice as expensive as its affordability benchmark of five, according to the authors.
Price to income ratio is the average price of a house or an apartment in a country or city divided by the average annual income of a household there.
“For instance, the PTI for a city like Mumbai should not be as high as a city like New York, because New York is a developed [high income] city, whereas Mumbai is a developing [low-to-middle-income] city. There is no set global benchmark [of affordability],” explained Agnihotri.
An estimated 17 percent of all urban households in India live in slums. The figure is 41 percent in Greater Mumbai, 30 percent in Kolkata, and 29 percent in Chennai, says the paper.
The study links the price of houses in any country, or its affordability, to the degree of transparency in its real estate sector. An indication of this is the Global Real Estate Transparency Index, released every two years by the real estate firm Jones Lang LaSalle (JLL).
The average PTI for countries in the ‘very transparent’ category of the JLL index is 8. India with a score of 2.73, on the 2022 list, is ranked 36 among 94 countries, which puts it in the “semi-transparent” category.
Explaining the transparency issue further, the CSEP report states that only 28 percent of Indian cities have approved masterplans, and nearly none of them are comprehensive enough or include the necessary financing and sequencing for critical plan recommendations.
What’s more, according to Gupta, it is unknown and doubtful whether the city will actually develop according to the plan and by what schedule. “If you make a master plan it is important to stick to it in a time-bound manner else it loses its credibility,” he added.
Also read: Urban India going for bigger flats. Except in Mumbai, where they’re getting ‘smaller & smaller’
Land use planning and its implementation crucial
The two commonly available data sources for house prices in India are the Reserve Bank of India’s (RBI) House Price Index and the National Housing Bank’s (NHB) Residex. However, neither source gives publicly available data on property prices before 2008-2009, states the paper.
The lack of past data was the biggest challenge faced by the researchers while studying the subject, said Agnihotri.
According to the researchers, house prices go through decadal cycles of quick price growth, followed by downturns that move in sync with the country’s broader macroeconomic situation.
In the last quarter of 2022, house prices in major cities appreciated by 4-11 percent, while sales recorded a 68 percent year-on-year growth, and new projects in these cities showed an year-on-year growth of 81, according to a JLL quarterly market update report on housing prices.
Using the RBI’s household finance committee report of 2017, which records the distribution of household wealth in the country, the paper states that 77 percent of India’s household wealth is in real estate, compared to 62 percent in China, 44 percent in US, and 37 percent in Germany.
According to the authors, future housing price rise will be determined by the macroeconomic health of the country — when the GDP rises, so do housing prices.
Structural reforms, aimed at clarifying and increasing credibility of land use planning and its implementation, are crucial. These reforms are expected to stimulate competition in the real estate industry, resulting in more affordable housing.
The way forward, according to the researchers, is “to attempt to make housing affordable not only through subsidies, but also by improving the fundamental structure of the sector. Strengthening the implementation of existing reforms like RERA [Real Estate (Regulation and Development) Act, 2016] and the digitisation of land records, among others, should be a priority since they have demonstrably helped make the sector more transparent”.
The paper adds: “… lastly, in order to assess and ensure that these reforms actually have the desired impact, the government needs to institutionalise rigorous and standardised measurement of key metrics like PTI across cities, the degree of industry competitiveness, and transparency in the sector, all of which are critical factors affecting housing affordability. Being able to track the sector’s performance under these metrics over time
will help us gauge the effectiveness of policies, and the outlook that needs to be adopted in the future”.
(Edited by Poulomi Banerjee)
Also read: Despite global headwinds, demand for housing remains strong in India