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Housing Price Indices- International Best Practices
And An Operational Housing Price Index for India
By Dr. Tarun Das, Professor (Public Policy), IILM, New Delhi-110003
Formerly Economic Advisor, Ministry of Finance and Planning Commission
1. Introduction
Housing and real estate constitute an important service sector in the national accounts. Table-1
indicates that the share of dwellings GDP had in general a declining trend since 1993-94. While
the share of dwellings in real GDP declined from 5.6 per cent n 1993-94 to 4 per cent in 2003-04,
that in GDP at current factor cost declined from 5.6 per cent to 4.5 per cent over the same
period. Table-1 also presents the trends of WPI, CPI-IW, and implicit price indices for
dwellings, financial sector ad real estate (which also includes dwellings) and GDP since 1993-94
derived from the national accounts statistics. It is observed that initially housing prices were
subdued and lagged behind other indices until 1999-2000. But, housing prices caught up other
indices since 2000-01 and the dwelling price index became the highest among all the indices in
2003-04.
Table-1: Share of dwellings in GDP and trends of prices
Share in GDP Price Indices (Base 1993-94 = 100)
Current
Price
Constant
Price
Dwellings
Price
Index
Financial
sector &
real estate
GDP
Price
Index CPI WPI
1993-94 5.6 5.6 100 100 100 100 100
1994-95 5.1 5.3 106 108 109 110 113
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1995-96 4.7 5.1 111 121 119 121 122
1996-97 4.5 4.9 117 124 128 133 127
1997-98 4.3 4.8 123 127 137 142 133
1998-99 4.2 4.6 136 137 148 160 141
1999-00 4.4 4.5 151 152 153 166 145
2000-01 4.6 4.4 166 159 159 172 156
2001-02 4.7 4.3 179 173 164 179 181
2002-03 4.7 4.2 190 183 171 187 167
2003-04 4.5 4.0 200 187 176 194 174
For macro-economic and monetary analysis, it is desirable to have real estate prices because
both lenders and borrowers may have large exposures (both direct and indirect) to real estate
and may be affected by the potential volatility of prices in the real estate sector. More over, real
estates constitute a major proportion of wealth in the private sector. Construction of real estate
prices is challenging due to heterogeneity in the real estate markets and ambiguity in the
market prices. The diversity and the lack of standardization in real estate markets require
collection and compilation of data for various market segments resulting in high cost and
greater technical sophistication.
2. Objectives and scope of the paper
Construction of a housing price index for a developing country like India is complex, as there
are various concepts for housing price indices, many ways for compiling price data and
different sources of data, both private and public. The methodology for construction of indices
differs from country to country depending on the use and purpose of such indices and
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availability of data. This paper makes a review of the concepts, methodology and sampling
designs, and collection of price data for construction of real estate price indices in selected
countries and presents a model for constructing an operational housing price index for India.
Presently, at the instance of the Ministry of Finance, the National Housing Bank (NHB) is trying
to construct a housing price index under the guidance of a Technical Advisory Group (TAG).
The TAG is chaired by the author and comprises members from the NHB, CSO, RBI, Labour
Bureau, HDFC, HUDCO, Dewan Housing Finance Corporation Ltd., LIC Housing Finance Ltd.
and the Society for Development Studies. It also consists of professionals and experts as
members such as Dr. H. Sadhak from the Management development centre, LIC and Mr. V.
Suresh, Former Chairman, HUDCO.
3. Review of Country Experiences on Housing Price indices
3.1 United Kingdom
The UK literature on the real estate price indices is the richest. There are seven major house
price indices developed for the UK, three of which are official- two are constructed by the Office
of Deputy Prime Minister (ODPM) and one by the Land Registry. Two other indices are
constructed by two leading mortgage lenders viz. the Halifax Building Society and the
Nationwide Building Society. Two other indices are constructed by two companies having
interest in housing markets viz. Hometrack and Rightmove. In addition, there are two main
survey based housing price indices produced by the Royal Institutes of Chartered Surveyors
and the House Builders Association.
Indices use varied techniques for prices (hedonic regression model and mixed quality
adjustment) and various weighting diagrams based on volume and value of houses. Table-2
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presents a comparative position of methods used to construct different housing price indices in
the UK.
The Halifax House Price Index
The Halifax House Price Index is the UK's longest running monthly house price series since
January 1983. The Index is derived from the mortgage data of the UKs largest mortgage lender
HBOS, which provides a robust and representative sample of the entire UK market. There are a
number of national indices covering different categories of houses (all, new and existing) and
buyers (all, first-time buyers and home-movers). These indices are adjusted to allow for
seasonal variations. The most commonly used and quoted Halifax Index is the UK seasonally
adjusted index covering all houses and all buyers. Regional indices for the 12 standard
planning regions of the UK are produced on a quarterly basis.
The indices calculated are 'standardized' and represent the price of a typically transacted
house. The need for 'standardization' arises because no two houses are identical and may differ
according to a variety of characteristics relating to the physical attributes of the houses and their
locations.
In summary, prices are disaggregated into their constituent parts using a commonly used
statistical technique called multivariate regression analysis or the hedonic approach. This
allows values to be attributed to the various qualitative characteristics (type of property, region,
etc.) and quantitative characteristics (age of property, number of habitable rooms, garages,
bathrooms, etc.) of a property. The technique allows tracking the value of a 'typical' house over
time on a like-for-like basis.
The Halifax hedonic regressions are derived from information on the following house
characteristics:
Type of property: Detached house/ terraced house/ Detached bungalow/ semi-detached
bungalow/ Purpose built flat/ new converted / Converted flat/maisonette
Tenure: freehold, leasehold, feudal.
Number of rooms: habitable rooms, bedrooms, bathrooms/ toilets
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Number of garages and garage spaces/ No garage or parking spaces
Central heating type
Floor size (sqft)
Age of the property.
Central heating: none, full, partial.
Garden.
Land area if greater than one acre
Road charge liability.
Location (region)
Wood (2003) critically examines the methodology, database and weighting diagrams of these
indices. The data and methods used to construct these indices are different and they have both
advantages and disadvantages depending on the purpose for which these are used. The Land
Registry Index uses the most complete dataset, but the data set does not record the details of
dwelling characteristics. The indices differ in their use of current or base weights, transactions
or stock weights, volume or value weighted (Table-3). The Hometrack and Rightmove indices
are likely to measure final transactions prices with errors. The Halifax and Nationwide indices
use the broadest quality adjustment techniques and a dataset that represents a good trade-off
between accuracy and timeliness. The author observes that the sampling and estimation errors
in the monthly and quarterly house price indices appear to be substantial.
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Table-2 Comparison of methods used to construct
Seven major house price indices in the United Kingdom (UK)
Name of the
index
Data source
and coverage
Quality
adjustment
method
Seasonally
adjusted?
Weights used Weighting
method
Measures
Old ODPM SML 5%
sample of CML
eligible
completions
Mix
adjustment
No Rolling
average of
SML
transactions
Expenditure Value of average
set of transacted
dwellings
New ODPM SML 30-50%
sample of CML
eligible
completions
Mix
adjustment
No Rolling
average of
Land Registry
transactions
Expenditure Value of average
set of transacted
dwellings
Land
Registry
100% of sales
registered in
England and
Wales
Simple
average
No None Expenditure Value of set of
transacted
dwellings
Halifax Loans
approved for
house
purchase by
Halifax
Hedonic
regression
Yes 1983 Halifax
loan approvals
Volume Price of Halifax
representative
dwellings
Nationwide Loans
approved for
house
purchase by
Nationwide
Hedonic
regression
Yes Rolling
average of
SML, Land
Registry and
Nationwide
transactions
Volume Price of
Nationwide
representative
dwellings
Hometrack Survey of
approx 4000
estate agentsestimated local
average prices
Mix
adjustment
No England and
Wales
Housing Stock
Expenditure Value of housing
stock
Rightmove Sellers asking
prices posted
on internet site
Mix
adjustment
No England and
Wales
Housing Stock
Expenditure Value of housing
stock
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Source: Wood, Robert (2003)
Notes: CML = Council of Mortgage Lenders, SML=Survey of Mortgage Lenders, Mix
Adjustment implies weighted mean prices for different sets of houses, grouped according to
locations and physical attributes.
Table-3 Weights used in UK house price indices
Transactions weights Stock weights
Base weights Halifax (Volume) Rightmove (Value)
Rolling weights Old ODPM (Value)
New ODPM (Value)
Nationwide (Volume)
Land Registry (Value)
Hometrack (Value)
3.2 United States of America (USA)
The most popular is the index developed by the Office of Federal Housing Enterprise Oversight
(OFHEO). The OFHEO estimates and publishes quarterly house price indices for single-family
detached properties using data on conventional conforming mortgage transactions obtained
from the Federal Home Loan Mortgage Corporation (Freddie Mac). Several researchers have
also used various methodologies, particularly hedonic regression models. Researchers have also
extended the research to establish relation between trends of real estate prices and other macro-
economic variables.
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Under the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (Title XIII of
P.L.102-550), the Office of Federal Housing Enterprise Oversight (OFHEO) as the federal
regulator is required to develop and administer a quarterly risk-based capital stress test to
measure the capital adequacy of the government-sponsored mortgage finance institutions of
USA viz. Fannie Mae and Freddie Mac. In the stress test, the statute requires OFHEO to use a
house price index to account for changes in the loan-to-value (LTV) ratios of mortgages held or
guaranteed by Fannie Mae or Freddie Mac. Chartered by Congress for the purpose of creating a
reliable supply of mortgage funds for homebuyers, Fannie Mae and Freddie Mac are the largest
mortgage finance institutions in the United States. Their combined mortgage records form thenation's largest database of mortgage transactions.
Accordingly, the OFHEO constructs a House Price Index (HPI) to measure the changes in the
value of single-family homes in the U.S. as a whole, in various regions and individual states of
the country. Because of the large sample size, OFHEO HPI provides more information than any
other house price indexes, and serves as a timely, accurate indicator of house price trends at
various geographic levels. It also provides housing economists with an improved analytical tool
for estimating changes in the rates of mortgage defaults, prepayments and housing affordability
in specific geographic areas.
The alternative HPI prepared by the Commerce Department (CQHPI) covers sales of new
homes and homes for sale, based on a sample of about 12,000 transactions annually, and
gathered through monthly surveys. OFHEO's quarterly HPI is based on more than29.31 million
repeat transactions over 30 years.
The HPI constructed by OFHEO uses quarterly data provided by Fannie Mae and Freddie Mac
on their most recent mortgage transactions. These data are combined with those for the
previous 29 years to establish price differentials on properties where more than one mortgage
transaction has occurred. The data are merged to create an updated historical database that is
then used to estimate the HPI.
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The methodology used by OFHEO in computing the HPI is a modified version of the Case-
Shiller geometric weighted repeat sales procedure, meaning that HPI measures average price
changes in repeat sales or refinancing on the same properties. This information is obtained by
reviewing repeat mortgage transactions on single-family properties whose mortgages have
been purchased or securitized by Fannie Mae or Freddie Mac since January 1975.
3.3 Canada
In Canada, The New Housing Price Index (NHPI) with base 1997 prepared by the Statistics
Canada is a monthly series that measures changes over time in the contractors' selling prices of
new residential houses, where detailed specifications pertaining to each house remain the same
between two consecutive periods. The survey also collects contractors' estimates of the current
value (evaluated at market price) of the land. These estimates are independently indexed to
provide the published series for land. The residual, (total selling price less land value), which
mainly relates to the current cost of the structure is also independently indexed and is presented
as the estimated house series.
The NHPI is widely used by researchers, housing economists and general public to track
housing price trends. Within Statistics Canada, the series are used for estimation of some
components of the Consumer Price Index. The series are used by the Canadian System of
National Accounts for deflating the national housing stock. Due to the level of geographic detail
provided and the sensitivity to changes in supply and demand, the series are also used by wide
range of people such as building contractors, market analysts, insurance companies, federal
government agencies like the Canadian Mortgage and Housing Corporation (C.M.H.C.), and
provincial and municipal housing agencies responsible for housing policy.
NHPI is estimated for a set of model houses selected in consultation with the builders and the
real estate developers. The universe consists of builders in 21 metropolitan areas who mainly
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build single unit houses in such volume or in such a fashion that they can report selling prices
for comparable transactions.
Weights
Separate weights are estimated annually at the level of the metropolitan area for the house
component, the land component and the total selling price series using building completion
data. Essentially, a price adjusted moving three-year average of the value of building
completions for each metropolitan area is calculated for the house component, and then
aggregated up to provide provincial and national indexes. In the case of land, the house to land
ratios obtained from the NHPI are employed to estimate the corresponding land value data,
also using a three-year moving average and aggregated in the same way. The total (house and
land) is then calculated using all this information.
To prepare a contractors' selling price index for a metropolitan area, price reports from the
sample of builders are given equal weights in index calculations. Amongst metropolitan areas,
weights are derived from housing completions data.
Secrecy and Disclosure of Data
It is a mandatory obligation of the builders and real estate developers to respond to the survey
for developing NHPI. Imputation rarely occurs for the NHPI, as the response rate is virtually
100%. However when required, a missing or delayed price will be imputed by carrying the
previous month's reported price forward. Under the Statistics Act, the Statistics Canada is
prohibited from releasing any data which would divulge information obtained under the
Statistics Act that relates to any identifiable person, business or organization without prior
knowledge or he consent in writing of that person, business or organization.
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Price data are converted to price indexes and data are released such that it is not possible to
identify the price data of the suppliers of the raw price information.
Data accuracy
The statistical accuracy of this index depends on price and value data. Price data are obtained
from a sample survey. Value data mainly rest on the quality of the building completion data.
Both kinds of input data are subject therefore to their own errors.
In terms of price data, it has been acknowledged since the inception of the NHPI that the house-
to-land split can contain some level of respondent bias. This is due to the difficult task of
separating the total value of a new house into a land portion and a structure portion. The
allocation of value in such a circumstance may be easy for one builder to provide and
conceptually difficult for another to determine.
Though the NHPI uses a sample survey methodology to obtain the necessary information,
confidence intervals are not currently estimated, due to the longitudinal nature of price index
series. Indexes for higher and lower levels of aggregation are considered to be statistically
reliable.
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Table-4 below provides trends of housing price indices for selected metropolitan area since
2000.
Table-4 Trends of New Housing Price Indices in Selected Metropolitan Areas
Base 1997=100 2000 2001 2002 2003 2004 June 2005
Canada 104.1 107.0 111.3 116.7 123.2 129.3
House only 106.2 109.9 115.9 123.0 131.1 137.1
Land only 101.3 102.2 103.5 105.0 108.0 114.0
Qubec 104.5 107.1 111.7 121.9 129.3 133.8
Montral 106.3 111.7 118.1 126.8 135.0 141.5
Ottawa 110.9 123.7 133.3 138.3 147.4 153.5
Toronto and Oshawa 107.8 110.5 114.2 119.5 126.6 133.0
London 104.2 106.8 109.8 115.0 120.4 127.1
Calgary 115.3 118.2 124.4 130.9 138.2 145.2
Edmonton 107.7 109.4 117.3 124.0 129.3 136.8
Vancouver 90.2 90.9 93.2 96.2 101.0 105.9
Victoria 85.8 86.2 89.3 96.2 105.0 112.0
Base 1997=100 2000 2001 2002 2003 2004 June 2005
Source: Statistics Canada
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4 An operational Housing Price Index for India
4.1 Reserve Bank of India (RBI)
Recently, a working paper prepared by the RBI (Joshi, Sharma, Augustine, Mathur, Bhuyan
and Majumdar 2005) reviews the methodology, sampling techniques, collection of price data,
for construction of real estate price indices in Canada (New Housing Price Index) and UK
(Halifax index) and suggests a methodology for India. It basically suggests the use of Hedonic
price model. But, such an index suffers from the drawback that the index is based on multiple
regression equations, which can be applied only with large sample size at the all India level and
may not be applicable at regional and sub-regional levels for lack of sufficient number of
observations. Even if data are available, it may be difficult to have a good fit and to specify a
representative housing unit. It will also be difficult to combine regional indices unless we know
the weights. In fact, the RBI working paper is incomplete. It discusses conceptual issues relating
to prices only, but does not deal with practical problems relating to determination of weights
and sources of reliable basic data on prices, stock and transactions of houses.
4.2 Society for Development Studies (CDS)
Another working paper prepared by the Society for Development Studies (2005) makes a
comprehensive review of methodology for construction of real estate indices in Canada, UK,
USA and Hong Kong, and suggests the use of hedonic approach for India. This paper also
suffers from the same weakness as in the RBI Working Paper
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4.3 An operational Housing Price Index for India
Above review indicatesthat as with many economic statistics, the measurement of house prices
poses significant conceptual and practical problems. The most important point is to note that no
one method of constructing a housing price index is ideal and it is better to construct a set of
alternative indices on the basis of available data, least cost and the purpose of the indices.
Construction of a Housing/ Real Estate Price Index for India, that satisfies international best
practices, is both a challenge and an opportunity for us.
Properties of a Good Housing Price Index
Like any other index, a good housing price index must satisfy a number of criteria:
Reliable data should be available easily and with least cost.
Index must be relevant for the purpose of the users.
Index must be easy to calculate.
Index should be easily interpreted.
Index should be easily updated at regular intervals.
Index should reflect the reality.
Index should be decomposable by regions and categories.
Index should be subject to usual statistical test.
After reviewing international best practices and wide ranging discussions, the Technical
Advisory Group decided to conduct a pilot study for Delhi and to use both the (a) hedonic
regression model and (b) the basic Laspeyres weighted index for constructing a HPI for Delhi.
The residential colonies in Delhi have been categorized as one of the 8 tax zones (A to G) as
decided by the Municipal Corporation of Delhi (MCD) under the Unit Area Method for
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property tax assessment (Table-5). The classification of the colonies is largely based on the level
of services and the capital value of housing units.
Table-5: Categorization of Colonies in Delhi according to Property Tax Zones
Category of
Tax zone
Number
Of colonies
Per cent
Of number
Area
(Sq. Km)
Per cent
Of area
No. Of
Sample
Colonies
A 52 2.6 21 4.1 2
B 51 2.6 31 6.1 2
C 161 8.1 72 13.9 4
D 201 10.1 94 18.2 4
E 220 11.1 58 11.1 4
F 528 26.6 129 25.0 6
G 772 38.9 112 21.7 8
Total 1985 100 518 100 30
Source: Report of the Municipal Valuation Committee under the Chairmanship of Mr. O. P.
Kelkar submitted to the Municipal Corporation of Delhi, 28thFebruary 2004
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A. Hedonic Model
Under the hedonic approach, multi-variable hedonic regression equations are estimated to
work out the index number at the sub-city level, by regressing house prices on various
characteristics of houses. This method is outlined as:
Ln (Pit) = 0 + i ln (Xit) + uit
This equation is a simple lognormal hedonic function, where Pit stands for housing prices
for unit-i in time t, and Xit for different housing characteristics. Different forms of egressions
equations can also be tried to specify the best fitted equation (Joshi et. Al. 2005). For aggregating
each of the sub-city indices into a city level real estate index, the Laspeyres approach will be
used. The weights attached to each sub-city level index can be percentage of transaction in that
zone to the total transactions in the city. The use of the Laspeyres approach to aggregate the
sub-city indices is consistent with the assumption that the percentage of transactions of each
zone to the total city transactions remains constant.
B. Laspeyres Housing Price Index
Laspeyres Price Index is a weighted average of indices for different tax zones under
consideration:
PI = W I
Where PI = Price Index
n = Category of tax zones , n=1, 2, 3 8
W = Weights for nth category of tax zone, such that W = 1
I = Index for nth category of tax zone
P = Prices of different types of houses
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C. Pilot Survey for Delhi
As mentioned above, a pilot survey is being conducted for Delhi. The TAG has selected 30
colonies in different tax zones on the basis of transactions for the collection of basic data. These
colonies are spread over all parts of Delhi such as South, North, West and East Delhi.
Choice of Base Period
Base year should be a normal year and for which all required data are available. The TAG has
decided to take 2001 as the base year for the construction of HPI and update the index on half
yearly basis. The choice of base year for HPI is consistent with the base period of other indices.
The new CPI (IW) series with revised base 2001 are ready for publication. CPI is available for
every month. The Base of WPI is being shifted to 2000-01. WPI is available for each week. Base
of National Accounts is proposed to be shifted to 1999-2000. GDP is available for each quarter.
The base of IIP is being shifted to 2000-01 and the spade works have already started.
For HPI, basic data are being collected for each year since 2000. For each selected colony and for
each year, information will be collected for at least 20 transactions, which actually took place
during the year. Thus there will be 600 observations for each year since 2000, and 3000
observations for six years from 2000 to 2005.
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Choice of Houses and Collection of Data
At the First Phase of the pilot study, only residential houses (both independent houses and flats,
and both old and new for sale) in urban areas with basic amenities are being considered. At the
second stage, commercial housing units will be considered and finally land may be included in
order to make it a comprehensive real estate price index.
Data on value, plinth area, location, age and basic characteristics of houses are being collected
from the property dealers, Residential Welfare Associations (RWAs) and the builders. The
objective is to collect the basic transactions price excluding taxes and duties and agents
commissions. It is well known that the registered values of houses are grossly under estimated
due to very high registration fees and stamp duty. Due to same reasons and subsequent
obligations for the payment of property tax, individual purchasers (except corporate bodies) do
not reveal the exact purchase price of a house.
Average Price
For each selected colony, average prices per Square Feet of plinth area will be estimated by
taking arithmetic mean, weighted mean, median and mode. Also a hedonic approach will be
adopted for Delhi as a whole for each year. As indicated in Table-6 below, no method is
completely free from errors and the use of a particular methodology depends on purpose, easy
availability of data and the resources available (in terms of technical manpower, money, time,
computer software and hardware) at the disposal of the authority in charge of collection,
compilation and preparation of+ the index.
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Choice of Weights
We need weights for each zone in the city. The TAG has decided to take the weights given by
the MCD report as indicated in Table-5 above. An attempt will be made to estimate both the
volume index (weighted by number of units) and the value index (weighted by total value).
Table-6: Alternative House Price Indices: A comparison
Type Advantage Drawback
1. Average prices- mean, median,
mode
East to collect and calculate No correction for quality
differences
2. Representative property
method
Avoid most quality change
problems
Focuses only on one set of
properties and ignores
developments of other properties
3. Hedonic regression models Controls for quality changes
Takes into account all possible
houses
Requires huge data
Potential bias for incorrect model
specifications
4. Repeat sales method from the
hedonic price model
Less data requirements,
Less dependent on model
Requires at least two sales,
Quality of the same property may
change during intervening period
Source: Paul Hilbers (2003)
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A Pilot Survey for Delhi Urban Area
As discussed above, there are several valid concepts of house prices and several ways of
constructing a Housing Price Index. Under the overall guidance of the TAG, the National
Housing Bank (NHB) conducted a pilot survey in Delhi with the assistance of the Society for
Development Studies (CDS), Delhi and adopted a practical approach to construct an operational
HPI for Delhi. If it is successful, the methodology can be applied to other cities in order to
prepare an All India HPI.
Sample Designs
The first stage of selection of sample colonies was on basis of the property tax zones in Delhi,
under the Unit Area Method for property tax assessment, based largely on level of services and
capital value of housing units. Tax zone H, which covers the rural settlements in the city, was
excluded from the coverage of the indices.
Residential Layouts
The second stage was to select 30 representative residential colonies in Delhi for this purpose
and covering transaction values. The distribution of the 30 colonies across the 7 tax zones is
based on the share of each tax zone in the total of 1,935 residential layouts/colonies in zones A
G (Table-7). Turnover rate of housing units was used as a criterion for selection of
representative colonies in the tax zones A G (Table-8).
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Table-7: Distribution of Colonies by Property Tax Zones
Property Tax
Zone
% of Area No. of Colonies % of colonies No. of Sample
Colonies
A 4.1 46 2.4 2
B 6.1 73 3.8 2
C 13.9 189 9.8 3
D 18.2 183 9.5 3
E 11.1 192 9.9 3
F 25.0 494 25.5 7
G 21.7 758 39.2 10
Total 100 1935 100.0 30
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Table-8: Distribution of Sample Colonies by Property Tax Zone and Location
Property Tax
Zones
South East West North
A New Friends
Colony,
Vasant Vihar
B South Extension
Safdarjung
Enclave
C Vasant Kunj Punjabi Bagh
(West)
Shalimar
Extension
D Mayur Vihar Dwarka Pitampura
E Yamuna Vihar Inder Puri Rohini
F Govind Puri Dilshad Garden
Pandav Nagar
Karampura
Raghubir Nagar
Nirankari Colony
Tri Nagar
G Dakshin Puri
Sangam Vihar
Sriniwas Puri
Ghazipur Dairy
Farm
Jhilmil Colony
Hari Nagar
Khyala (I-III)
Jahangir Puri
Mangol Puri
Sultan Puri
Source: Technical Advisory Group on Housing Price Index, NHB, 2005.
Representative Basket
At the third stage of market segmentation, in each of the selected layout/colony, both new and
resale housing units, flatted and plotted, developed by the following agencies were included in
the sample:
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1. Delhi Development Authority
2. Cooperative/ House Building Societies
3. Private builders
4. Households (plotted)
5. MCD Slum and JJ Department
6. Private developers, without planning permission
Housing Units
At the fourth stage of market segmentation, the housing units covered for the representative
basket were classified as the following categories:
EWS and LIG housing, up to 2 rooms and covered area less than 500 sq. ft.
MIG housing with covered area between 500 1,000 sq.ft
HIG housing units with covered area more than 1,000 sq. ft.
Base Year
As mentioned earlier, year 2001 was taken as the base year for the construction of HPI to make
it consistent with revised base periods for national accounts, CPI and WPI. The index was
developed for the calendar years rather than the financial year, as the transaction data were
collected largely on recall basis for the period 20002005.
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Data Requirements and Sources
Primary and secondary data were collected on housing stock, real estate prices and housing
attributes for the 30 selected layouts/colonies. The primary data were collected from the real
estate agents, office-bearers of Resident Welfare Associations (RWAs) and cooperative societies
on the basis of stratified random sampling techniques for the selected colonies. The primary
survey generated information on 20 transactions per annum for each of the selected colonies for
the period 2000-05. The data were cross-checked with secondary data obtained largely from
newspapers, real estate journals, large real estate agencies and websites.
Surveys were conducted by the National Housing Bank with assistance by the SDS. Detailed
questionnaires were prepared for all surveys on data collection. Each survey team comprised of
students with knowledge of Economics, Sociology and Housing.
House Price Index Model for Delhi: Weighted Average Model
Two critical data items required for HPI are house price and quantity of housing units covered
in the transaction during the year. The collection and compilation of these two basic
information for the base year and other years were challenging due to heterogeneity in the real
estate markets and ambiguity in the market prices.
a. House Price Data
An average house price data in each reporting period was calculated by dividing the sum of
house prices by the number of units for which there were transactions during the period. Such
average price indices are probably the most widely available price measures for real estate, in
the form of average house price.
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b. Housing Stock Data
The data on housing stock were collected from the housing delivering agencies1 for all the 30
colonies. For the formulation of the house price index based on weighted average method, the
quantities of housing stock under each category had to be estimated. The collection of this data
was done mostly through secondary sources including the DDA and the MCD.
City House Price Index
1Delhi Development Authority, Municipal Corporation of Delhi, Office of the Registrar Cooperative Societies,
House Building Societies, Cooperative Federations, Private Builders
For each tax zone, average price of housing per square feet (AP) was estimated by the weighted
average of average housing prices for different categories i.e.
AP2001 = (W1000)
Then zone-wise price indices were calculated for all the zones for all the years. The results arepresented in Table-9.
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Table-9: Tax Zone Wise Index
Tax Zone 2001 2002 2003 2004 2005 Weights
A 100 121 131 174 209 4.1
B 100 105 124 156 172 6.1
C 100 94 116 114 146 13.9
D 100 89 121 151 279 18.2
E 100 117 157 136 164 11.1
F 100 110 131 156 295 25.0
G 100 113 128 164 203 21.6
City HPI 100 106 129 149 226 100
% Increase 5.5 22.2 16.0 51.1
Source: Technical Advisory Group on Housing Price Index, NHB, 2005.
Category Wise House Price Index
The category wise House Price Index has been calculated for covered area less than 500 sq.ft,
500 to 1000 sq.ft. and more than 1000 sq.ft. Firstly, the total weighted price was
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Table -10: Category Wise House Price Index
Category
(sq.ft.) 2001 2002 2003 2004 2005
< 500 100 109 150 137 181
500 to 1000 100 110 132 152 209
>1000 100 158 187 225 297
Source: Technical Advisory Group on Housing Price Index, NHB, 2005.
Limitations of Weighted Average Index
Problems in weighted average indices can be to the extent that they do not reflect the current
mix of transactions, may not capture information on sectors where a standard unit of real estate
cannot be defined, and do not adequately capture information on rapidly developing sectors.
6. Trends in House Price
In Delhi, real estate prices had hit the roof in 1997, fuelled by acute shortage of land and
speculative investments. The bubble burst in 1998 was an outcome of speculators liquidating
their holdings. Prices fell by 40-80 per cent, virtually wiping out the entire capital of the
speculative investors. The first signs of recovery became evident in 2003 when prices started
recovering. Since then, spurred by easy access to housing loans from banks along with fiscal
incentives, real estate prices across the city had been rising on a sustainable basis.
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The prices increased at a constant rate from year 2000 to 2002 at around 6 percent. There was a
sharp increase from 2003 (22.2%) onwards; the year 2004 witnessed an increase of 16 percent,
and 2005 as high as 51 percent.
There are many factors, which have contributed to the sharp increase in the real estate prices.
The major factor is the 2005-06 budget, which retained the deduction on interest on housing
loans, despite several advisory committees advocating its reduction/ phasing out.
Secondly, after the FDI norms were changed with respect to minimum area criteria for
development of integrated city from 100 acres to 25 acres, many foreign developers have shown
an interest in the Indian market. This might help in improve the efficiency of the housing sector
operations. But, it is doubtful that it would lead to lowering of the price of an apartment.
The most important factor leading to property price rise in Delhi in recent years is the increase
in general accessibility of major colonies due to starting of Metro Rail and its expansion to far-
flung areas and neighbouring states.
7. House Price Index Model for Delhi: Hedonic Method
As mentioned earlier, the Hedonic method is useful to analyse value-influencing factors of the
property separately from temporal factors. The hedonic equation used to statistically estimate
the house price index is,
P= X +
Where,
P is a vector of dependent variable, which is the transaction price of a house,
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X is the vector of characteristics on which the price of a house depends. These include
structural, locational and legal characteristics. Various dummy variables have been used to
measure the amenities, location, access to market, multiplex, hospitals, educational institutes
etc.
is the vector of coefficient of variables and measures the effect of changing the house
characteristics on the house value,
is the random error term.
The variables used to estimate the hedonic price index are indicated in Table-10. After fitting
the regression line for a particular year for all the zones and for all the observations, a typical
house is chosen to estimate the representative price per square feet from the fitted hedonic
regression line for that particular year. The TAG took a two-bed room house with plinth area of
1000 square feet and with all civic amenities as the typical house for determination of the
hedonic price index.
Table-10: Housing Attributes for Hedonic Model Housing Price Indices
Housing Attributes Indicators for Hedonic Model
Internal Characteristics
Covered Area The natural log of the covered area in square feet is taken
Delivery Agency 1: DDA, 2: Co-operative Society, 3: Private Builder
0: Self Constructed
Stand alone/Flat 1: Independent house, 2: Duplex Flat, 0: Flat
Age Number of years
Location of storey 1 to 8
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Number of Toilets/Bathrooms In number
Number of bedrooms Dummies 0 to 5
Building Quality 0: Normal Finish, 1: Superior Finish, 2 for Old
Amenities
Sewer Connections 1: Available, 0 Not Available
Electricity Number of hours for which electricity available
Water Supply Duration of piped water supply
Environmental and Legal
Location 0 to 6 for tax zones A to G
Near Main Road 1: Yes, 0: No
Near Market 1: Yes, 0: No
Near Bus Stand 1: Yes, 0: No
Near Metro Station 1: Yes, 0: No
Near Schools 1: Yes, 0: No
Facing green area/park 1: Yes, 0: No
Three side/corner house 1: Yes, 0: No
Form of transaction 1: Legal Title, 0: Power of Attorney
Ownership Status 1: Leasehold, 0: Freehold
Home loan 1: Yes, 0: No
Buyers Profile 1: Business, 2: Employee, 0: Builder
Note: *: Dummies are naturally coded in STATA
Source: TAG Hedonic Model
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(a) Analysis and Results
The estimated hedonic regression results for all the zones taken together indicated that all the
co-efficients were significant at 5% level of significance. However, it was observed that covered
area was the most significant factor influencing the price of a house (91 % of the price is
explained by it) followed by the location of the property in terms of tax zones.
Other variables found statistically significant include the legal status of the property
(authorized or unauthorized colony) with houses in unauthorized colony commanding lower
price. Type of ownership also makes a difference to house prices with people willing to pay a
higher price for freehold properties.
Quality of construction, type of house (.LIG, MIG etc), accessibility as measured by nearness to
the main road (has positive impact on price), increase in distance from the metro (has a negative
impact on price) were other variables influencing the house prices in Delhi.
Access to schools, market etc, and amenities like water facilities, power load shedding etc. were
dropped from the regression as they were statistically insignificant. The variables water and
electricity could have been insignificant because there was a widespread problem of recall by
the real estate agents.
Age has, surprisingly, a positive sign implying that people are willing to pay more for older
properties. However when a regression was run dividing the age in two different groups i.e.
less than 17 years and more than 17 years, the co-efficients for age were positive in the former
case but negative for the latter case.
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Zero bedroom houses are generally tiny plots allotted by the MCD Slum Wing in resettlement
colonies. The estimates show that zero bedroom houses are preferred over one bedroom flats.
This could be because people in these colonies can expand vertically as per family need and
improvement in financial capability. This is however not possible in the case of one bedroom
LIG flats. Also seen in the regressions of individual tax zones E, F and G that people are willing
to pay more for larger living areas.
The characteristics that play an important role in determining the house prices in different tax
zones as shown in the regressions for individual tax zones are practically the same for all the tax
zones i.e. covered area, quality of construction, form of ownership, whether the house is in an
authorized or unauthorized colony and accessibility (as measured by any one of the variable i.e.
nearness to the main road, bus or metro). The co-efficients for public service like bus has been
shown even if it is statistically insignificant as in tax zones C and D to show lack of
capitalization.
In a couple of tax zones the floor location of the flat is also statistically significant. Higher floors
command lower price. This could be as no lifts are available in most apartment complexes inDelhi.
Co-operative flats are available in tax zones D and E. Though house delivery agency was
statistically insignificant in tax zone D, tax zone E shows that people were willing to pay a
higher price for co-operative flats as compared to DDA flats. This could be because co-
operatives provide better facilities like security, water supply, parking etc.
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(b) Assessment of Trends
Zone wise and City House Price Index obtained from the hedonic regression is presented in
Table-11. The trend in house prices show that the prices in Delhi, taking the base year as 2001,
were in depression prior to 2001, but showed an increasing trend thereafter. The prices were
49% higher in 2005. The prices started increasing at a faster rate especially from 2003. The
increase could be attributed to increasing BPO businesses, growing middle income group and
easy availability of cheap housing loans.
Taking the base year as 2001, the table shows that the prices increased at a high rate from 2003
for almost all tax zones and that the maximum price increase i.e. 86% happened in the Tax Zone
D in 2005 followed by Tax Zone A (68%). The colonies falling in Tax Zone D category are
Dwarka, Mayur Vihar and Pitampura. While, the ones included in Category A are New Friends
Colony and Vasant Vihar
The increase in price in Dwarka and Mayur Vihar could have happened due to the fact that the
prevailing property values in many parts of south Delhi has put them out of reach for most
middle class investors, however prices in Dwarka and Mayur Vihar are still affordable. Also,
Dwarka is close to Gurgaon while Mayur Vihar is close to Noida. These are the two places
where commercial activity is increasing. This could also be the reason for purchase of properties
in these colonies. Thus increasing the residential prices there. Further, initiatives like the metro
and flyovers along with affordable house prices, could explain the increasing purchase of
property in Pitampura.
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Table-11: House Price Index by Tax Zones
Tax Zone 2001 2002 2003 2004 2005 Weights
A 100 112 135 155 260 4.1
% Increase .. 12.0 20.5 14.8 67.7
B 100 110 125 150 170 6.1
% Increase .. 10.0 13.6 20.0 13.3
C 100 90 110 115 140 13.9
% Increase .. -10.0 22.2 4.5 21.7
D 100 90 120 145 270 18.2
% Increase .. -10.0 33.3 20.8 86.2
E 100 119 150 165 190 11.1
% Increase .. 19.0 26.1 10.0 15.2
F 100 110 125 155 250 25
% Increase .. 10.0 13.6 24.0 61.3
G 100 115 130 147 200 21.6
% Increase .. 15.0 13.0 13.1 36.1
City HPI 100 105 125 148 227 100
% Increase .. 4.7 19.6 18.6 53.1
Source: Technical Advisory Group on Housing Price Index, NHB, 2005.
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While the increase in price in Tax Zone A could be due to increasing construction of builder
flats in these areas. Therefore, creating a demand of those who otherwise would not have been
able to afford an independent house in an up market south Delhi colony like Vasant Vihar.
(c)Limitations of the Hedonic Approach
With the approach used in the study a house price index is available which can track house
prices. However, some important limitations must be kept in mind. These are,
a) Sample selection bias because,
1. The index uses only the information from houses that have self selected for sale from the
entire housing stock
2. The data was collected from only those realtors who were willing to provide the data for their
transactions.
b) So far as the prices are concerned, knowing the amount of black money that goes into the real
estate transactions, there might have been under reporting of the transaction prices by the
realtors.
c) For some variables there was the problem of recall by the real estate agents, especially, for the
years 2000, 2001 and 2002.Hence the information for some of the variables, especially those
pertaining to load shedding, water supply etc may have some degree of inaccuracies
In spite of these drawbacks the exercise of tracking the house prices is useful. Data collected on
a more regular basis for transaction price as well as for characteristics in future will certainly
improve the index.
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8. Conclusions
Housing is an important asset in the Indian economy with strong backward and forward
linkages. The high level of volatility in the housing market requires that the price movement is
adequately tracked for smooth functioning of the economy. The study presents the preliminary
results of employing the Weighted Average method and the Hedonic regression method as
techniques for developing House Price Index for Delhi. The price trends follow almost similar
pattern for both the weighted average and the hedonic method for the city and the different tax
zones.
For a House Price Index to be meaningful, it must compare prices of equivalent houses from
one period to the next. This is difficult as no two houses are identical. Therefore, a system of
measurement is required which allows for differences in the sample houses traded i.e. data
should be quality adjusted. In order to solve this problem adoption of the hedonic method is a
step in the right direction as this method estimates the trends of prices for typical houses sold
and purchased during the year.
Selected References
Calhoun, Charles A. (2003) OFHEO House Price Indices: HPI Technical Description, pp.1-14,
Office of Federal Housing Enterprise Oversight (OFHEO), Washington, D.C.
Das, Tarun (2005a) Housing/ Real Estate Price Indices- Issues for Discussion, paper presented
at the First Meeting of the Technical Advisory Group (TAG) on the Housing Price Index,
National Housing Bank (NHB), July 2005.
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Das, Tarun (2005b) An Operational Housing Price Index for Delhi, paper presented at the
Second Meeting of the Technical Advisory Group (TAG) on the Housing Price Index, National
Housing Bank (NHB), August 2005.
Das, Tarun (2005c) Construction of Services Price Index- A case Study for Housing Prices,
paper presented at the Seminar on the Construction of Services Prices, organized jointly by the
Ministry of Commerce and Industry, PHD Chamber of Commerce and Industry, World Bank
and the IMF, at the PHDCCI, New Delhi, November 2005.
Das, Tarun (2006) Housing Price Indices- International Best Practices and An Operational
Housing Price Index for India, pp.44-54, Bima Vidya, Journal of the LIC Management
DevelopmentCentre, Borivili West, Mumbai-400003, March 2006.
Eurostat (2004) Construction Price Indices- Sources and Methods.
Fan, Kelvin and Peng, Wensheng (2003) Real estate indicators in Hong Kong SAR, pp.124-148,
BIS Papers No.21.
Fenwick, D. and H. Duff (2002) An improved house price index- update on developments,
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Hilbers, Paul (2003) Methodological issues regarding residential real estate prices, pp.228-231,
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Joshi, Ajit R., Anil Kumar Sharma, Sushila Augustine, Deepak Mathur, Pradip Bhuyan and
Debashis Majumdar (2005) Construction of Housing Price Index for India: An Approach, pp.1-
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Lall, Vinay (2005) Country Experiences in Developing Real Estate Price Index, pp.1-12, Society
for Development Studies, New Delhi. May 2005.
Society for Development Studies (2006) Draft Report on the Housing Price Index for Delhi,
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Statistics Canada (2004) New Housing Price Index: Concepts, Methodology and Data Sources.
Wallace, Nancy E. (1996) hedonic Based Price Indices for Housing: Theory, Estimation and
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Wood, Robert (2003) A Compilation of UK residential house price indices, Bank of England,
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