The Reserve Bank of India (RBI) may soon come out with two real estate indices — one reflecting movements in residential property prices and another for commercial property rates. A RBI report on asset price monitoring system has recommended that the indices should be revised every quarter. If RBI accepts the suggestions, the indices could be handy for financial markets as well as the central bank which decides the monetary policy. Several countries like the US, Canada, France and Hong Kong rely on their respective property index to gauge the asset price movement in the country.

The report observed that lack of transparency in the residential property market transaction, absence of a single centralised regulator in a vast country like India and limited availability of price information pose important challenges for keeping track of real estate price dynamics and their relationship with financial stability and monetary policy. The report has recommended that the RBI should compile real estate price index on quarterly intervals and to begin with data should be collected for Delhi and Mumbai. Subsequently, RBI could add 11 other cities — Chennai, Bangalore, Hyderabad, Kolkata, Pune, Jaipur, Greater Chandigarh, Ahmedabad, Lucknow, Bhopal and Bhubaneswar

A real estate price index would be a primary index that institutional investors may rely on to sense the performance of the real estate sector. It would capture how real estate performed compared with other asset classes like stocks and bonds and also provide a better understanding of the risk and return for commercial real estate. The index may be used as a basis for developing diversification strategies such as the percentage allocation to real estate to minimise risk for a target portfolio return. It would also be the first available index to measure the performance of income coming from this sector. The group has recommended that RBI should take inputs from banks and select home finance companies on sale and resale prices. This is because builders may not share property price information due to intense competition in the sector.

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