The Robustness of Residex as a House Price Index

Background: Despite popular and public debate on housing prices, there has been little published data on residential housing price movement in India. The accurate measurement of real estate price movements is an issue of concern to market participants and policymakers who rely on its price signals for decision-making. For many countries, real estate represents the largest component of both household and national wealth and forms a significant part of investment portfolios. Given the increasing prominence of real estate as an investment medium, adequate techniques to measure real estate price behaviour are essential. House price variation also affects the costs of public programs designed to encourage home ownership as well as cost-of-living indices. In India, the National Housing Bank (NHB), regulator for housing finance companies had launched the first housing price index called NHB Residex for five cities - Delhi, Mumbai, Bangalore, Kolkata and Bhopal in the first phase. The Finance Minister P Chidambaram launched this index in July 2007. In the next phase, NHB will launch the index to 35 cities having population over a million as per the 2001 census. The residential index of a city will be a number that will suggest the average value of residential properties at that point of time in the city in comparison to 2001, which has been chosen as the base year. Residex would hence help banks and housing finance firms in portfolio evaluation and collateral security for their housing loans by marking their collateral value changes to the index. The index would also be a useful tool for macroeconomic policy analysis for monetary and fiscal policy formulation.Approach: The objective of a House Price Index (HPI) is to provide an accurate measure of the contemporary rate of change in the prices of the stock of established houses. The scope for the HPI is restricted to those dwellings where the primary purpose is residential (i.e. excluding commercial properties) regardless of ownership or tenure of the occupants. House price indices are widely available in several countries; however they are prone to biases due to the heterogeneity of properties. There have been a number of studies that have analysed suitability of the existing indices and proposed alternative methods / models of computation to overcome bias or errors as seen in studies by Chau, Wong et al (Chau, Wong et al. 2005) for Hong Kong, Young (Young 2005) for NCREIF, Baroni, Barthelemy et al (Baroni, Barthelemy et al. 2005) for INSEE and Iversen (Iversen 2001) for Dade County, Florida. In other words, these index models have to distinguish between movements in prices and changes in the composition of dwellings sold from one period to the next. Hence models that involve some quality control should be used. In the course of this paper I introduce three such methods that exist: the repeat sales approach, the hedonic method and the hybrid method. A key differentiator in these methods is whether we need to have a high degree of control of data and its quality. All the three models, repeated sales, hedonic and hybrid lead to constant quality indices, but such indices require large databases with detailed sets of property attributes. Amongst the three, the repeat sales indice is the easiest to administer, but does not necessarily produce true constant quality indices (Bourassa, Hoesli et al. 2005). In this article I aim to provide an authoritative account of real estate HPI for houses and apartments in India. The approach of this paper has been a review house price models, its background as well as the applicability to the residential real estate market in India. This paper sums the various methodologies of computation of Residential House Price Index and seeks a comparison of the virtues of these methodologies with the Residex. This paper proposed to validate the representativeness of the Residex on data collation, data quality and appropriate modelling. The further aim of this paper is to present a methodology for a robust residential house price index in India and compare the same with the Residex for representativeness. Given the realities of data available and its insurmountable quality problems, this paper proposes steps to determine a robust House Price Index for India.Limitation: This paper does not look at empirical evidence, as this is a theoretical inquest. Where possible I draw on studies that draw on data, and also supplementary data in some cases.Originality– ‘Residex’ is the first national real estate price index launched in India and would be the barometer of real estate price movement in India for the government and general public. The study looks at comparison of an Ideal Index and the robust India HPI with the Residex. This study envisages a comparison of various HPI formulations and proposes a robust HPI for India given the limitations in our market. The study concludes with a comparison of this robust index propositioned with the Ideal Indian HPI and the Residex.