The Hindu Business Line : ‘There is a strong case for a Housing Index’

Housing Start-up Index (HSUI) — a measure of new residential projects that start in a particular period and an important economic indicator — could soon become a reality in India. Globally these indices are a critical economic indicator reflecting the level of activity in a slew of sectors across the economy.

The RBI-constituted Technical Advisory Group (TAG) on HSUI has recommended construction of this index on a quarterly basis. TAG has also suggested that the RBI constitute a standing committee to launch the initiative, monitor its progress, commission and overview surveys for constructing start-up coefficients, and consider increasing the scope of HSUI over time.

Prof. Amitabh Kundu, Chairman, TAG and Member, National Statistical Commission (NSC) believes that HSUI can be operationalised in one year’s time. In an interview with Business Line, he discusses the relevance and timeliness of the proposed housing index, its objective, and methodology.

Excerpts from the interview:

What is the objective of an HSUI for the Indian market?

There are a number of macroeconomic indicators based on which the central bank and Ministries take their decisions. One of the critical indicators used by many developed countries is housing start-up because the housing sector has backward and forward linkages. Once housing units are started, you know how much of demand will come for cement and steel and all the inputs that go into the construction — that is the backward linkage. Forward linkage is in terms of furniture and consumer durables.

Also, once a dwelling unit comes up, the residential area needs certain facilities. We did an analysis of the interdependence of the housing sector, and found that at least 60 per cent of the industries are linked somehow with this sector. So I believe that there is a strong case and a long standing need to have an HSUI.

TAG also went into a detailed analysis of housing indices in other developed nations. What has been their experience?

Housing index has been found to be very useful in some of the policy interventions in developed countries, and India should also have it. The stakeholders in the urban development sectors in these other countries look forward to the housing index. Even in India, researchers and policymakers who are exposed to the global scene, are looking forward to having this index compiled on a regular basis.

Who would be the real beneficiaries of HSUI in the Indian market?

To think that the index will only be useful for the Housing and Urban Development Ministry, will be incorrect. The Ministry of Industry, for instance, could be interested and so would the construction sector. Also, financial institutions would track it closely. Even private developers and builders, and industries such as consumer durables will benefit. It will find larger use in monitoring macroeconomic developments as well.

What are the key components that will go into compiling the HSUI?

When you project demand for any commodity, the general models used are normal regression, where you identify the factors influencing the demand. But, for housing, you cannot merely take the current variables including the policy variables and feed it into some simple regression model, because there are social and administrative rigidities to be taken into account.

For instance, once you get a permit, you cannot immediately convert it into a housing demand no matter what the pricing or interest rates are. Invariably you will find that about 40 per cent of the starts happen within a quarter, and about 20 per cent starts will spill over to the following quarter, and so on. Hence, the coefficients indicate how much time elapses before permits get converted into starts.

So the HSUI can be compiled based on two sets of data — the start-up coefficients reflecting the recent experience of conversion of housing permits into housing starts; and the number of permits issued in the last two years.

TAG had submitted its report earlier this month. How much time do you think it will take to put all the information together and have the index up-and-running?
I believe that with the interest the RBI is showing in ushering this, it would take about a year to release the first housing start-up. What we need is the survey, and also the data (housing permits) for the past eight quarters.
In the Indian context, the good thing is that 90 per cent of the permits get converted into housing starts within three quarters. So even if you take four quarters, you can be reasonably certain about the housing starts that are taking place. But I would like eight quarters of data to come in. So in my view within a year it should be possible for the RBI to operationalise it, and make it public.
Has the need for this index been necessitated in the backdrop of the global financial meltdown and the sub-prime crisis?
TAG was set up even before the first indication of global meltdown became visible. The long-term demand was there for housing index and a country growing at 7 per cent needs such tools for monitoring. HSUI is one of the important instruments to keep a tab on the health of an economy.
What we had so far was the number of building permits that are issued, and to an extent the construction in the public sector is reported directly by the State Statistical Bureau. So, while we have information on how many building permits have been issued, these do not immediately get converted into housing starts. Some get started in the same quarter, some in the next quarter. All this information exists in local bodies but is not compiled. It now needs to be put in a system. This is one of the major issues that our committee discussed.

Feedback to blproperty@thehindu.co.in

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