House Prices in India: How High, and for How Long?
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Addressing the nation on Independence Day, 2023, the Prime Minister announced that the government is working on an interest relief scheme to help urban residents living in rented housing, slums, and chawls own a house. The intent is well-placed since access to housing is a prerequisite for a dignified life, and yet, it remains unattainable for a significant proportion of Indians; 17% of all urban households live in slums. The situation is especially grave in India’s bigger cities—41% of households in Greater Mumbai, 30% in Kolkata, and 29% in Chennai live in slums. Successive governments have focused on providing housing to the disadvantaged, arguably the most notable efforts being the Indira Awas Yojana (IAY) for rural areas, and the ongoing Pradhan Mantri Awas Yojana (PMAY) for urban areas. Given the scale of the housing deficit, despite a significant push by the government to resolve this problem, it is imperative to understand two fundamental questions: (a) How expensive is housing in India, and why? (b) What explains the tepid increase in house price growth over the last 7–8 years? Answering these questions will provide clarity on how to tackle this challenge going forward.
Housing in India is indeed expensive relative to its yardstick of affordability, but we are not alone. At a price-to-income ratio (PTI) of 11, housing in India is more than twice as expensive as its affordability benchmark of 5. Housing in countries like the United States, Australia, and Germany with PTIs of 3.6, 7.6, and 9, respectively, is more affordable. On the other hand, several other countries, especially in the developing world, such as Bangladesh, Sri Lanka, and China have PTIs that are worse than India’s at 12.3, 26.3, and 29.1, respectively.
India’s high house prices are, however, not due to a supernormal price increase over the past 30 years, but due to structural problems afflicting the real estate sector. House prices have appreciated by 9.3% on an annual basis between 1991–2021, which is similar to gold at 9.2% and lower than the Sensex at 13.5%. This pattern and profile of returns across assets is consistent with those in other countries. House prices (housing affordability) move in tandem with the degree of transparency of the real estate industry, which comprises structural elements such as the regulatory and legal architecture, and transparency across transaction processes, among others. For countries comprising the ‘highly transparent’ cohort in JLL’s Global Real Estate Transparency Index, the average PTI is 8, compared to an average PTI of close to 14 for the ‘low transparency’ countries. India is currently part of the ‘semi-transparent’ cohort, which has an average PTI of 13.6. It is noteworthy that we have been adjudged as the “best improver” in the Asia Pacific (APAC) region over the past couple of years by this Index as a result of reforms like the digitisation of land records through the Digital India Land Record Modernization Programme, and the implementation of the Real Estate (Regulation and Development) Act.
One of the key reasons for India’s ‘semi-transparent’ ranking is the lack of credible and rigorous land use planning and implementation, which leads to a constrained and unpredictable supply of land. Only 28% of Indian cities have approved master plans and almost none are granular enough, and do not contain the requisite financing and sequencing for key plan proposals. This absence of granularity and concomitant financing makes it unclear and uncertain if the city will actually develop according to the plan and by what timeline. This milieu makes the entry of new real estate players (developers) difficult, giving rise to a less-than-competitive industry structure. Such an industry structure incentivises and enables real estate developers to maximise profits by keeping prices high and supply low. It comes as no surprise, then, that when compared to other industries like IT, Auto, and FMCG, real estate in India has a significant number of firms making supernormal profits (of more than 20%) in the long run. A less-than-competitive real estate industry operating in a semi-transparent environment induces economic agents, especially those with unaccounted income (the shadow economy) and/or insider information (about planning policies such as land use changes), to invest in real estate, reinforcing the high price structure. It is testimony to the general popularity of the asset that 77% of India’s household wealth is in real estate compared to 62% for China, 44% for the US, and 37% for Germany.
A corollary of the argument thus far is that the tepid house price growth witnessed in the last few years does not portend a more affordable housing regime in the future. House prices go through decadal cycles of rapid price growth followed by downturns that co-move with the broader macroeconomic environment in the country, and the current cycle is no different. House prices have gone up by 3.7% per annum between 2017 and 2022, compared to an annualised increase of about 9.3% between 1991 and 2021. During the same period, real GDP growth was 3.9% and 5.8% respectively. The real estate industry is beginning to show signs of revitalisation on the back of strengthening economic fundamentals, particularly GDP growth. In 2022, house prices in major cities appreciated by 4–11%, sales recorded a 68% y-o-y increase, and new launches increased by 81% y-o-y. Ceteris paribus, house price growth in the future will depend on how the underlying macroeconomic trajectory evolves from hereon.
The need of the hour, thus, is to accelerate the implementation of policy reforms by focusing on releasing (developable) land supply in a transparent manner through credible and rigorous land use and implementation. This will increase competition by enabling and encouraging the entry of new real estate developers, putting pressure on prices, and in turn, improving affordability. Not only will this provide a large segment of Indians with access to decent housing, but in the process will also boost GDP growth and create muchneeded non-farm employment. To ensure that such reforms actually have the desired impact, the government needs to institutionalise rigorous measurement and tracking of key metrics like the PTI across cities, industry competitiveness, and transparency of the sector, all of which are critical for affordable housing.
Media
House prices in India shot up 15 times over last 3 decades: Study – Indian Express
What explains high housing prices in India? ‘Lack of credible land use planning, shadow economy’ – The Print
Q&A with the authors
- What is the core message conveyed in your paper?
Houses are expensive in India, but do not represent a bubble. Housing is not expensive due to an inordinate increase in prices over the past few decades, but due to structural problems afflicting the land and housing markets—a lack of credible and rigorous land use planning and implementation, which gives rise to a less-than-competitive industry structure. Such an industry structure keeps prices high and housing supply lower than it would have been in a competitive industry. The semi-transparent nature of the industry provides a safe haven for economic agents, especially those with unaccounted income and/or insider information, to invest money in real estate, keeping prices high. The tepid house price growth witnessed in the last few years is only cyclical and, thus, does not indicate a more affordable housing regime in the future. House prices go through decadal cycles of rapid price growth followed by downturns that co-move with the broader macroeconomic environment in the country.
- What presents the biggest opportunity?
Government schemes have usually aimed at making housing affordable by focussing on increasing the housing stock through subsidies, rather than addressing the root cause by unlocking land supply in a predictable manner. For instance, under the ongoing Pradhan Mantri Awas Yojana (PMAY), 11.89 million houses have been sanctioned at an estimated central outlay of Rs 2 lakh crore. this ought to be supplemented with more structural reforms—such as improving clarity and credibility in land use planning and implementation— which will make the real estate industry more competitive, in turn making housing more affordable. Not only will this provide a large segment of Indians with access to decent housing by lowering house prices, but in the process will also boost GDP growth and create much-needed non-farm employment.
- What is the biggest challenge?
The biggest challenge in resolving the housing unaffordability problem in India is making the real estate sector more transparent. A lack of credible and rigorous land use planning and implementation leads to constrained and unpredictable supply of land. This gives rise to a less-than-competitive industry structure, incentivising and enabling developers to keep prices high. These, along with the presence of a moderately-sized shadow economy, make real estate a preferred store of value, inflating demand, pushing prices further up. By addressing the root of the problem, i.e. issues with land use planning and implementation, the real estate sector will become more competitive and transparent, and housing more affordable.
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The Centre for Social and Economic Progress (CSEP) is an independent, public policy think tank with a mandate to conduct research and analysis on critical issues facing India and the world and help shape policies that advance sustainable growth and development.