REAL ESTATE NEWS
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Index For The Residential Market
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National Housing Bank (NHB) has recently launched a residential price index (NHB Residex) for five cities (Bangalore, Bhopal, Delhi, Kolkata and Mumbai). The base of the index is 2001 and the index is presently reported annually until 2005. NHB plans to extend it to 35 cities in the next phase and will cover 63 cities subsequently. Even in its present form, with such a short time series, it?s quite informative. It was interesting to see that the house price growth in Bhopal was higher than Mumbai during 2001-05.
As per media reports, NHB plans to track this index semi-annually. It?s a step in the right direction towards making the residential real estate market more transparent and efficient. However, we must understand what this index conveys and how such indexes have been used in markets where they have existed.
Methodology
My search for a note on the methodology used by NHB has, at the moment, been futile. This by no means, indicates in any way that methodology used in the construction of NHB Residex is not robust.
The scientific methodology typically used in the construction of residential price index is based on the ?hedonic? approach to price measurement. The jargon means that goods are valued on the basis of attributes they possess. Let me explain this in the case of housing. First issue with residential market is that no two houses are similar, because their location and physical attributes may differ. Another problem is that a particular house does not sell frequently so observations related to a house are not many (may be one or two over 20-25 years).
What Residex implies
It is important to understand that the growth/fall based on the index movement does not imply that all houses would see similar growth or fall. This movement represented by an index is only at the average (standardised house) and there would be houses, which would see larger growth/fall than this average, and there would be those, which would see smaller growth/fall. The growth or fall in prices would depend on the constituent attributes of each individual house.
However, price index measures the changes in prices of a standardised bundle and avoids such problems. Yes, the index would not reflect the price appreciation/fall of a particular house but would be a good representation of the trend in the real estate market.
Benefits of the index
How can this index be used? There is already a discussion in the media that such an index would help in rationalising stamp duty, property tax, capital gains tax etc. In addition there are other benefits. In markets like UK, sophisticated investment products have been developed around residential price indexes. One of them is ?house price futures?. Futures markets are primarily to hedge against future price movements. Home owners/developers can ?lock? in a price now and take uncertainty away by buying house price index futures. Suppose an owner/developer is looking to sell house(s) in one year?s time and the futures are at a premium.
Author is Senior Lecturer (property) at University of Aberdeen Business School, Scotland.
Source:
The Indian Express Piyush Tiwari
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