The Housing Price Index is a quarterly report by the Reserve Bank of India (RBI) based on the all-India price movement from data collected from a few cities. The indices are based on official data of property price transactions obtained from the respective state governments' registration authorities. In this article, let us see the meaning of the House Price Index, how to calculate it, and the trends of the HPI.

What is the House Price Index?

• A house is more than just an asset; it is also a long-term consumption good for households, providing shelter and other services.
• Households' perceived lifetime wealth is affected by changes in house prices, which influences their spending and borrowing decisions.
• The Reserve Bank of India publishes a quarterly house price index (HPI) for ten major cities: Mumbai, Delhi, Chennai, Kolkata, Bengaluru, Lucknow, Ahmedabad, Jaipur, Kanpur, and Kochi.
• The base year for calculation of HPI is 2010-2011.
• These indices are based on official data on property price transactions collected from the respective state governments' registration authorities.
• Beginning with Mumbai, the Reserve Bank began compiling a house price index (HPI) in 2007 and published a quarterly HPI for Mumbai (base: 2002-03=100).
• The coverage has been expanded over the quarters by incorporating 9 more major cities, namely, Delhi, Chennai, Kolkata, Bengaluru, Lucknow, Ahmedabad, Jaipur Kanpur, and Kochi, and the base has been shifted to 2010-11.
• In addition to individual city HPIs, an average HPI representing all-India house price movement is compiled.

How to Calculate HPI?

• First, the simple average price (per square meter) of houses in each category, classified as small, medium, and large, is calculated for each ward/administrative zone in each quarter based on floor space area (FSA).
• Second, the weights are determined by the proportion of houses transacted in the three FSA categories within a ward/zone between April 2010 and March 2011.
• Price-relatives are then calculated for each quarter based on an average per square meter price for three FSA category houses in each ward/zone. The price relative is simply a ratio of the current period price to the base period price.
• Following that, the quarterly ward/zone weighted average price relatives are computed.
• These weighted relative prices are then averaged, with the weights being the proportion of houses transacted in each ward to the total number of houses transacted in the city between April 2010 and March 2011.
• To obtain the all-India index, the city-specific price indices are averaged using the population proportion (based on the 2011 census) of the ten cities.

Trends in HPI

• The All-India HPI increased by 2.0% year on year (y-o-y) in Q1:2021-22, compared to 2.75% growth in the previous quarter and 2.8% a year ago; HPI growth varied widely across cities, ranging from +8.8% (Ahmedabad) to (-) 5.1%. (Chennai).
• On a quarterly (q-o-q) basis, the all-India HPI increased by 0.5% in Q1:2021-22; however, the HPI decreased in Mumbai, Delhi, Chennai, Kanpur, and Lucknow, while it increased in the other five cities.

Chart: Movement of House Price Index

Limitations

• The HPI presented here is based on registration price information.
• It is commonly assumed that registered house prices are generally understated due to a variety of factors such as high registration fees and stamp duty, property tax obligations, and so on.
• The differences in the time gaps between actual transactions and registrations do not always follow a consistent pattern across states.
• In different states, property registrations take into account different criteria, such as
  • partial consideration of undivided share of land,
  • partial consideration of the sale of terrace rights,
  • consideration of the agreement to sale at the time of booking for total price, and
  • sale deed only after property completion.

Conclusion

Housing Price trends determine the growth of the construction sector. When the price of a house rises above the cost of construction, the value of the house rises relative to the cost of construction; thus, new construction is profitable when the price of the house rises above the cost of construction. They even influence bank lending rates and hence should be calculated objectively.