Does a housing
investment pay at all?
You may not believe
it but data show average real appreciation in residential property in urban
India over 2007-14 was zero..
By Mr. Gurbachan
Singh, Economist
It is widely believed
that urban residential property in India is an excellent asset for large
returns. But, is this borne out by data? Not really.
The NHB Residex (an
index constructed by National Housing Bank based on "actual transaction
prices") covers 26 cities all over India. The index stood at 100 in 2007
for each city.
For January-March 2014, the all - India index
was 178.69 (arrived at by taking a simple average of the index levels for the
26 cities). An increase from the base value of 100 in 2007 (on, say, 30 - 6 -
2007) to the recent value of 178.69 (on, say, 31 - 3 - 2014) translates to an
average appreciation rate of 8.97% annually.
This by itself is
lower than the appreciation rates most people have in mind when they think of
appreciation in the price of residential property in urban India. So, the
public beliefs are not correct. However, there is even more to the story. There
has been an average annual inflation rate of about 9.25% since 2007-08 (this is
based on the data used for computing real capital gains for income tax
purposes). Inflation eats into whatever returns there are.
An 8.97% nominal
appreciation alongside a 9.25% inflation rate implies the real appreciation
rate over the period 2007-14 is a negative 0.28% annually.
Let us simplify and
say the real appreciation has been zero. This is the basic story according to
NHB data. This contradicts widely held beliefs in India.
A weighted average
across 26 cities instead of a simple average can increase the computed
appreciation rate but not enough to change the basic story.
There are
considerable regional variations. Chennai has witnessed real appreciation of
nearl 11% annually, whereas Kochi has seen real depreciation at an average rate
of nearly 11.5 % every year since 2007! Delhi and Mumbai have seen average real
appreciation of 1.47% and 3.8%, respectively.
The NHB data is
consistent with a recent International Monetary Fund report. It showed an
international comparison of real appreciation in real estate in 52 countries
for 2013, fourth quarter or / latest
(annual per cent change). There are 18 countries which had witnessed
depreciation in real terms.
And, guess what?
India showed the maximum depreciation in real terms, at about 8%!
The NHB data shows
there has been hardly any real appreciation in urban residential property in
India in the last 7 years or so. We do not know anything about real
appreciation in the earlier years from NHB data. Then, real appreciation might
have been high. This can explain why people historically believe residential
property is a good asset for investment purposes. This can also explain why
absolute prices, as distinct from appreciation rates in prices, are high at
present in parts of India.
Further, NHB data
covers change in the price of residential property & not a change in price
of land. It appears that appreciation in the latter case is more but, again,
nothing definite can be said on the basis of published NHB data.
Finally, the average
appreciation can be higher for new projects than in the case of property in
older developments. It is the newer projects which are more in the news and so,
there is a perception of more appreciation than there really is.
Financial savings of
households dropped from 11.6% of gross domestic product (GDP) in 2007-08 to a
poor 8% in 2011-12 (chart 1.11 in the Financial Stability Report of the Reserve
Bank of India (RBI), June, 2013).
This has been an
important reason for the economic slowdown in India. One important reason for
the large non-financial savings is a considerable investment in real estate.
This is, in turn, due
to expectations of high appreciation. Now, it turns out that this expectation
is somewhat different from the reality in the past seven years. There is need
for greater awareness, so that investors (and their financiers) are not
disappointed later.
Low real appreciation
is not good news for investors but it can be great news for new actual users,
who are much more in numbers. Over time, housing can become more and more
affordable if the recent trend continues. This can gradually obviate the need
for the government to provide a stimulus for the sector in one form or another.
There will also be
less need for special schemes to provide affordable housing. Good, as such
schemes come at a high cost to the public exchequer and usually involve red
tape and corruption. The size of the market can anyway expand if prices are
low. There can be a higher growth rate in real estate development,
construction, employment and possibly even revenue for the government.
Real estate prices
have a white money and black money component. It may be argued that official
data pay attention to the former and this results in underestimation.
This is right insofar
as absolute prices are concerned but not quite valid where appreciation is
concerned. Since it is the appreciation which is the focus here, the NHB data
on changes in the index may be used.
All this is assuming
that the proportions of the two components stay more or less the same over
time. There are plausible reasons for both an increase and a decrease in the
proportion of the white component in the price. We can not assume either way.
So, we may simply assume they are unchanged. Then, NHB data can be used.
NHB has done a
pioneering job in bringing out Residex.
Some may raise
questions of methodology, and rightly so. While it can be very healthy to raise
such questions, it can also be at the same time useful to somewhat update our
beliefs on the basis of the data so far.
The writer
Mr. Gurbachan Singh is an independent economist. He teaches an advanced course
in financial economics at Indian Statistical Institute, Delhi (January-April).
His work can be accessed at https://sites.google.com/site/gurbachansingh61/
Home: M-65 South City
I,
Gurgaon,
Haryana, India, PIN: 122001
Phone: +91 - 99100
58954
E-mail:
gurbachan.arti@gmail.com
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