A section of the market is taking comfort from the falling core inflation (excluding food and fuel) but that may be deceptive. A substantial chunk of it is due to softer home price index that could be due to lack of uniform matrix to measure this inflation.
The index does not reflect the reality where `housing’ in the consumer price index (CPI) is up less than 5 percent when rentals in the metros have surged more than 12 to 15 percent. ” We believe this has much to do with computational issues across the board – inflation in rented houses, owner-occupied houses, and government dwellings” said Pranjul Bhandari, Chief India and Indonesia Economist at HSBC.
But the Indian household is being wary of housing inflation even as the recent surge in CPI inflation breaching the upper tolerance band of 6 percent at a 15 month high of 7.44 percent in July is driven by a surge in vegetable prices.
In the latest round of households’ inflation expectations survey conducted across 19 cities by the Reserve Bank of Indian shows that the percentage of households expecting the housing prices to go up- 86.8 percent over the one year horizon is higher than the percentage of households expecting the food prices to go up- 84.7 percent. But housing inflation with a weight of less than 10 percent in CPI is missing prominent market attention because it is a part of core inflation which is moderating of late relative to food and fuel prices.
The housing index in CPI does show a rather slower pick-up in rents with housing inflation rising to 4.7% average between Sept 2022 to July 2023 v/s 3.6% average in 2021. The pick-up is softer than expected. ” There could be a delay in capturing of rise in housing rents due to the fact that rental agreements usually range between one to two-years” said Gaura Sengupta, India economist at IDFC First Bank. ” So the index will capture more of the rise in housing rents as more rent agreements come-up for renewal”.
Besides, the housing inflation largely captures data from mostly urban centers where rise in rentals may not be uniform. ” For example rentals have shot up sharper in larger metros like Mumbai and Delhi and may not be so much in tier 2 or 3 cities”, said Rahul Bajoria, head of EM Asia (ex China) Economics research at Barclays Investment Bank. “Within a city too rent increase may not be uniform across various pockets for that matter”
Another factor that complicates computation of housing price inflation and inflation expectations is the conflation between house price and rentals. ” The price increase and its impact on inflation expectations for a house owner who has a mortgage can shift as rates rise, and EMIs can change. But in India the EMI does not necessarily change, especially in an externally benchmarked rate regime. Only the tenor increases. While in countries like Australia, there is a direct impact on the EMI which goes up with the rise in interest rates” Bajoria said.
Also, even in case of rentals, given the way the sampling is conducted, an increase in rent gets fully captured only after a minimum of six months minimum, depending on the length of the rent agreement.
Sengupta expects the rise in rents to be gradually captured in the remainder of FY24. We expect housing inflation to gradually rise to 5.5% in Q4 FY’24 v/s 4.8% in Q1 FY’24.
