Real estate indices: Mirroring the market

The need for realty indices

The real estate sector is a very critical one deeply intertwined with the country’s Gross Domestic Product (GDP). Growth in this segment results in a corresponding increase in the GDP, while a slump can also impact it adversely. It thus becomes necessary for the sector to be carefully monitored by the government. Only then can crucial issues be identified and even rectified with the help of fiscal or monetary policies. Identifying these issues and capturing the price movements on a comprehensive scale are the prime reasons why such indices are so vital.

In fact, these realty indices are considered a very late entrant to the sector due to factors like the unorganized nature of the industry, absence of relevant market data, lack of transparency in the industry, low level of corporatization, and predominantly proprietorship control in the business. It was only in 2007 that Bombay Stock Exchange launched the first property index (BSE Realty Index) to attract more investment in the sector and facilitate international realty players to take stock of their Indian counterparts.

Methods for constructing indices

There are numerous methods for generating home-price indices, each with its own merits and demerits. Some of these techniques rely on simple summary measurements (averages), such as the median price of houses sold in a certain time. The advantage of these approaches is their relative simplicity, both in terms of computing and in terms of results interpretation.

Simple measures, on the other hand, are prone to compositional and quality issues. Price statisticians can now effectively account for compositional and quality factors thanks to recent advancements in more complex approaches (such as hedonic regression and repeat sales methods). However, such methods are heavily reliant on accurate data.

Key real estate indices

Let us enumerate some real estate indices in India that facilitate buyers to make an informed decision – be it investing in realty stocks or buying an apartment for end-use or for investment.

  • BSE Realty Index

This was the first index that was launched in 2007. It provides an in-depth analysis of the performance of the listed companies as well as the general trends prevalent in the sector. 

  • NHB Residex

As the first official housing price index of India, this tracks housing prices across different Indian cities. It helps buyers in their decision-making by enabling comparisons over time and across cities. From the point-of-view of the developers, it can help them assess the demand scenario in a locality and in mapping the housing requirements in different parts of the country.

  • RBI RPPI

Reserve Bank of India has introduced its own residential property price index (RPPI), wherein the information is sourced from financial institutions as well as housing finance companies. RBI also compiles the Housing Price Index (HPI), the data collected from the Department of Registration and Stamps of state governments. HPI enjoys certain advantages over RPPI in terms of coverage and accuracy since all residential transactions are not financed by financial institutions. 

In addition to these indices, there are a few more operational in the sector, which has its roots in realty portals, real estate research agencies or valuation companies.

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