RBI says no asset bubble in India…what is the basis?

In  its Annual macro review 2010-11, RBI said on housing markets:

Asset price concerns remain as housing prices remain firm

V.19 Property prices continued to rise in most cities during Q3 of 2010-11, as reflected in the Reserve Bank’s Quarterly House Price Index (HPI) based on data in respect of seven cities collected from the Department of Registration and Stamps (DRS) of the respective State Governments. However, the indices for Delhi and Chennai witnessed a decline during this period.

Post Apr-11 monetary policy, RBI Governor D. Subbarao said:

“Although there is no asset bubble as such, asset price concerns remain as housing prices remain firm,” said RBI governor D Subbarao.

Both statements raise concerns over prices remaining firm but say there is no bubble. I agree one cannot identify a bubble but atleast one can look at the evidence available post the 2007 crisis.

Let us analyse the Case Shiller Index:

  • one sees the composite 20-cities index at 100 in Jan-2000.
  • This doubles to 206.5 in Apr- 2006 implying the index more than doubles in roughly 6.3 years marking a CAGR of 12.1%.
  • City-wise differences are significant with likes of Miami and Los Angeles index rising to around 280 in the same period with a CAGR of 17.8%.
  • But prices of Detroit and Cleveland hardly rising at all at with Detroit index at 127.05 in Dec-05 and Cleveland at 123.49 in Jul-06 implying a CAGR of just 3.5-3.9%.
  • When you plot all these cities together you get a nice graph of how this whole thing panned out. One things is there prices rose in most cities from their start levels in 2000 making it a nation-wide rise in housing prices.
  • This led to both kinds of views – one, there is no bubble and prices have risen based on rise in incomes, preferences for real estate as an investment etc. Second, the trends are dangerous and nation wide price rise shows irrational exuberance. First said there cannot be a nation wide bubble and even if prices correct it will be in few regions not all. Second said these are dangerous signs and would lead to a nation wide crisis
  • We know which group won in the end.

In Ireland housing prices index was around 150 in Jan-00 and 310 in Jan-06, marking a CAGR of 12.9% ( Some say it increased by 100% in 10 years leading to a CAGR of 7.2%). Spain’s housing prices too follow a similar path like US. The index was around 1000 in 2000 and rose to 2800 by 2009 and has declined thereafter (CAGR of 12.5%).

Coming to India. NHB Residex recently released data for Oct-Dec 2010-11 quarter. The index started in 2007 and we now have data for 15 cities. Based on this graph and index, we can see how prices have risen. Just a few quick points:

  • Only in Hyderabad and Jaipur Residex is lower than 2007 base value of 100
  • Bangalore and Kochi have barely managed to cross the 2007 base. In Bangalore the prices have jumped by 37% in one quarter alone (from Jul-Sep 10 index jumped from 74 to 101 in Oct-Dec 10)
  • In roughly 4 years from 2007, indices have doubled in Kolkata and Chennai. Chennai so far was rising the highest till Jul-Sep 10 but has slowed a bit now. Kolkata tops the list of cities registering highest price rise in the 2007-10 period.
  • As we can see the index has doubled in quicker time in few cities than seen in US. I just calculated CAGR in each city:
 

2007 Index

Oct-Dec 2010 Index

CAGR

Kolkata

100

213

20.8

Chennai

100

204

19.5

Faridabad

100

176

15.2

Bhopal

100

173

14.7

Mumbai

100

173

14.7

Ahmedabad

100

164

13.2

Lucknow

100

152

11.0

Patna

100

146

9.9

Pune

100

141

9.0

Surat

100

133

7.4

Delhi

100

123

5.3

Kochi

100

101

0.2

Bengaluru

100

101

0.2

Hyderabad

100

87

-3.4

Jaipur

100

66

-9.9

Average

100

143.5

9.5

Note: NHB does not give an average index. I have just computed it to give some broad idea.

  • As we can see, CAGR is much higher than what we saw in US cities in 2000-06 period widely called as the bubble period now.
  • Out of the 15 cities, CAGR is in double digits in 8 of them (including Patna at 9.9%).
  • CAGR average in each of the three countries discussed above in their bubble periods is at 12-13%.  Based on this, benchmark (12%), higher CAGR is seen in 6 cities.
  • Mumbai is usually on the radar for high prices but prices have risen faster in other cities as well. This does not mean Mumbai is cheap by any means. It starts from a much higher base price than others.

So clearly, prices have risen much faster that bubble economies in 6 of the main 15 cities – Kolkata, Chennai, Faridabad, Bhopal, Mumbai and Ahmedabad. National average is around 10% which is still 2-3% lower than the bubble economies average. Prices have risen sharply in Bangalore, Kolkata and Lucknow in the Oct-Dec 2010 quarter. So may be our policymakers are still waiting to touch the 12-13% magic figure before some action.

However, if the policymakers include the black component as well, I am sure the magic mark has already been breached. As it is housing prices are underestimated big time in India because of the black component.

The above bubble economies are all developed rich economies. These kinds of quick rises in India just keeps many people away from buying homes. In a way it is good. The government can say we did not have home ownership as our goal like developed economies. The prices kept rising here which led to lesser number of people buying homes.

I can understand the central bank saying it cannot do much on the housing prices beyond tightening bank lending (which is wrong as much more can be done) but one cannot ignore these developments. Atleast now you have so many data points to compare things with.

5 Responses to “RBI says no asset bubble in India…what is the basis?”

  1. snimavat Says:

    Surely there’s real estate bubble in india, and it is going to bust soon
    Stay away..

  2. Anup Says:

    I am planning to buy a 1900 sq ft flat in Ahmedabad at 2250/sq ft. I have been living in Pune since the last 4.5 years and find that the rates are too high considering the infrastructure of the city…. i have rented flats in few of the posh areas over there and all of them have problems with water supply/electricity/good roads and then the heavy traffic….comparatively I always find Ahmedabad a much better place to stay…except the heat in summers….Ahmedabad did not see such a steep rise when cities like Pune were booming in realty, but that has happened in last 3 years……considering the better city-facilities here, what do you suggest… should i backout on buying this flat and wait for prices to drop??? …

    I am of the opinion that prices will correct here by remaining stagnant here for few years after jan/feb…

    • Amol Agrawal Says:

      i wish I knew whether to buy or sell apartments. Though if you are planning to live, just go ahead if you have the money. Investing is always a problem in such economic situation..

  3. logicalcliff Says:

    This is an old article..But just wondering whether your index and CAGR is inflation adjusted or not. That would make a huge difference for India.

  4. logicalcliff Says:

    I am decently sure that these prices are not inflation adjusted. Looked at the official description on the NHB website. Also scoured a few other web pages. No mention of real (inflation adjusted) prices.

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