Home truth index

An index of residential house prices in India, it tells us how residential house prices have moved over a period of time. You could see it as a Sensex for residential house prices. The Sensex tracks India’s 30 most valued and transacted companies — it was 100 in 1979 and stands over 15,000 today. Likewise, NHB (National Housing Bank) Residex for Mumbai which was 100 in 2001 (the starting point or ‘base’), stood at 178 in 2005. In other words, between 2001 and 2005, properties in Mumbai rose by 15.5 per cent per annum.

For jargon junkies, data for Residex has been collected for three categories — low, middle and high income groups. Statistical techniques have been employed to create a representative index, which is a weighted average of prices in different localities in that city.

• Why has it been created?

Partly to benchmark best practices that exist across the developed economies. This index is probably the first such that’s being constructed for a developing economy. The idea is to capture price movements of residential property and help individuals, economists, businesses, bankers and policymakers take informed decisions on cities or localities over time. It will help the government take decisions on monetary policy, administration of property tax and stamp duty rates, income tax and capital gains calculation, valuation and so on.

• What’s the big deal?

Take a home buyer. In one city there are thousands of apartment complexes or residential colonies. In each such area, there are hundreds of houses and apartments. In each such set, there are varying degrees of price considerations — which side the property faces (sun, swimming pool or garden), whether it’s Vaastu friendly or not, how old the building is, freehold or leasehold. And finally, on each property there are half a dozen brokers, offering as many prices, each of which is ‘negotiable’. How do you get the ‘right price’? Residex tries to bring in all this complex data, gathered from property dealers, resident welfare associations, development authorities or municipal corporations and private builders, into one number.

• How accurate is it?

In terms of precise prices, this index will be as accurate as the last deal. In other words, not dependable. But you don’t construct or study an index to get the precise price of the underlying asset. You look at an index to see and capture trends. If the Sensex has risen from 10,000 to 15,000 in 17 months, it shows a 50 per cent rise in less than two years. From here, an investor can take a call on whether it’s overpriced, whether it’s moved up too fast too soon, or there’s still steam left. Likewise, this index will show how house prices in various cities have moved.

To illustrate, among the five cities covered, while Bangalore prices, rising at 28.8 per cent per annum between 2001 and 2005, have been the fastest growing, Kolkata has been the laggard at 12.1 per cent. With this information, a home buyer or an investor can take buy-sell calls. For instance, whether Bangalore has peaked and hence will fall and Kolkata will now speed up to match the other metros, or whether there’s still scope for growth in Bangalore as Kolkata will continue to languish.

• How many cities does it cover?

The index looks at five cities — Bangalore, Bhopal, Delhi, Kolkata and Mumbai — with two subgroups in Kolkata (Kolkata Municipal Corporation and Kolkata Metropolitan Area) and Mumbai (Greater Mumbai City Corporation and Other Municipalities). But NHB proposes to extend the Residex to 63 cities covered under JNNURM (Jawaharlal Nehru Urban Renewal Mission).

• If Bangalore has risen from 100 to 275, does it mean all properties in the city or area have risen together?

No. As mentioned earlier, this index is a broad indicator of trends in a city. It does not tell you how each and every house or complex or colony has performed.

• So why is it important?

Housing data tell us the pace of transactional activity in what is probably the most valuable, the most expensive and the most dreamt-of asset a household buys in its lifetime. To that extent, when this index goes up it shows that households have been paying higher prices for houses, indicating confidence in the economy that translates into a ‘wealth effect’ under which people feel wealthy and spend more, thereby accelerating economic growth. This index will capture the rise as well as the fall in house prices.

• Who can use it?

Individuals can see trends and decide whether or not to buy houses. Policymakers can study it to see the impact of a falling stamp duty on revenue collections. Bankers can examine it to know how vulnerable the buyer will be if the index has gone too high too fast and hence can change their allocation. Economists can use it to simultaneously capture and forecast trends. And journalists have one more research tool at their disposal.