Determinants of Indian housing market: effects and counter-effects

Abstract

Purpose The purpose of this paper is to study the effect of the 2008 global financial crisis on housing market dynamics in an emerging economy like India using quarterly data (Q4 2008–2009 to Q1 2018–2019). The study explores the extent of linkages between housing prices, monetary policy and financial stability by explaining the nature of the shocks to the housing sector and the degree of impact of those shocks; the possibility of adverse feedback loop which is beyond the natural levels; and the usefulness of explicit and direct role of monetary policy for the housing market stability, which was the loudest demand immediately after the crisis. Design/methodology/approach The paper follows a three-step methodology: data transformations, a variable selection process “general-to-specific modelling” with the help of OxMetrics 6 Package, and vector autoregressive modelling with the help of EViews 10. F-test was used to describe the short-term relationships between the variables. Impulse response and variance decomposition were used to explain the type of relationship (negative or positive) and the period of the relationships, respectively. Findings The study finds that the housing sector is sensitive to the monetary policy shocks, whereas the contribution of the housing market shocks to the fluctuations in other market variables is not substantial, though not negligible. As far as the nature of the shocks is concerned, the observed dynamics in the real house prices are diverging from their fundamental levels. The housing market shocks are more or less static; it rules out the chances for a self-reinforcing feedback loop with the existing setup. Research limitations/implications The study concludes that the observed dynamics in the real house prices are diverging from their fundamental levels. Given the limitation, the researchers could extend this study by decomposing the part of the risk to the sector contributed by the other drivers, which may be inherent imperfections in housing markets, weak and unreliable wealth effect, and the presence of behavioural biases. Practical implications The present study finds countercyclical measures to be more useful for this sector as compared to the forward-looking monetary policy reforms in this sector. The central bank in India should continue to refrain from responding directly to the housing sector fluctuations. Investors can enjoy investing in the housing sector without any fear of the crisis as of now. The effect of speculation is small but not negligible, which enjoins the investors and the policy-makers to remain watchful. Interest rate, money supply and inflation lead (Granger-cause) the housing prices. This information is relevant for spending and investment decisions. Social implications The study feels that banks should avoid using monetary policy to balance the house prices. This will be beneficial both for the economy and the society, as any change in monetary policy to especially curb out surging housing prices may adversely affect the output, and finally, may lead to the deflation. The fear of deflation may cause devastating economic, financial and social effects. Originality/value The study contributes to the literature by shedding some new insights about the interrelationship between macroeconomic variables, housing prices and financial stability in the aftermath of the 2008–2009 financial crisis. Such types of studies are absent from emerging markets, particularly from India.

Housing prices in emerging countries during COVID-19: evidence from Turkey

“…Inflation is another variable that is frequently considered in studies. Pashardes and Savva (2009), Mohan et al (2019), Karada g and Saliho glu (2020), Korkmaz (2020), Pandey and Jessica (2020), Pontiggia andSivitanides (2020) andAliefendio glu et al (2021) are some of these studies that include CPI as a variable while analyzing housing prices. We prefer considering CPI as a determinant.…”

“…While the literature focuses on mainly housing demand (Follain and Jimenez, 1985;Zabel, 2004;Arslan et al, 2013;Chow and Niu, 2015;Hatipo glu and Tanrıvermis , 2017;Öztürk et al, 2018;Arestis and Jia, 2019;Pontiggia and Sivitanides, 2020) and housing supply (Follain, 1979;Stover, 1986;Öztürk and Fitöz, 2009;Davidoff, 2013;Chow and Niu, 2015;Ciarlone, 2015;Öztürk et al, 2018;Pontiggia and Sivitanides, 2020), housing prices have also been coming to the attention of researchers recently (Mohan et al, 2019;Korkmaz, 2020;Pandey and Jessica, 2020;Yılmazkuday, 2020;Aliefendio glu et al, 2021;Ma et al, 2021). Hence, the present literature involves studies on housing prices examining the impacts of various variables on housing prices.…”

“…Housing credit volume is also effective on housing prices. Égert and Mihaljek (2007), Hatipo glu and Tanrıvermis (2017), Cuestas and Kukk (2020), Pandey and Jessica (2020) and Pontiggia and Sivitanides (2020) include housing credits in their studies and determine that housing credits are effective on housing prices. In line with these studies, we include housing credit volume as a variable and a positive relationship is expected between housing prices and housing credit volume because an increase in housing credits can cause an increase in housing prices by stimulating demand.…”

Evolution of the housing market under the framework of adaptive market hypothesis and martingale difference hypothesis: a case of India

“…Being a good alternative to the stock market (Pandey and Jessica, 2016), the real estate investment in India needs more studies that can adequately explain its nature. Earlier studies on the Indian housing market such as Mahalik and Mallick (2011); Mallick and Mahalik (2015); Pandey and Jessica (2019a) have worked on determinants of housing prices using traditional theories of finance and Jessica (2018, 2019b) have worked on the behavioural aspect of the housing market. It will be insightful to examine the changing degree of housing market efficiency in an emerging market, like India.…”

Performance of commercial and residential real estate investments in Ibadan property market, Nigeria

“…Real estate constitutes one of the three basic needs of man and plays a significant role in man's overall life and wellbeing. Its immense contribution to national development and the economy of nations cannot be overemphasised (Pandey and Jessica, 2019). Binovska et al (2018, p. 7) asserted that "real estate is the basis of the national wealth of any country, which is considered as the backbone of the market economy".…”