‘Rising home prices and rentals a new inflation threat’

Housing prices will rise steadily in the next few years, experts have warned. Representation pic/AFP

Rising home prices and rentals in large Indian cities could pose a new challenge to the RBI in its fight against inflation, even though headline consumer price rises have likely peaked, analysts warn. Housing rentals and ancillary costs have a 10.07% weightage in India's consumer price inflation basket and are near three-year highs, posing a fresh worry for the RBI that had to contend with rising food prices for most of last year.

Housing has turned sticky and is being watched closely for indications of second-order effects, a senior official aware of the Reserve Bank of India's (RBI) thinking said. Urban housing inflation rose to 4.47% year-on-year in December 2022, versus 3.61% in the same period a year ago and 3.21% in December 2020, data from the Ministry of Statistics and Programme Implementation showed.

Core inflation, which typically excludes volatile food and fuel prices, remained close to 6%. "Core inflation has continued to remain sticky and hence an increase in housing inflation poses a significant risk to the overall inflation outlook," said Aditi Gupta, an economist at Bank of Baroda. In the top seven cities, rentals rose 20%-25% on average in 2022 from pre-pandemic levels, with some of the more popular housing societies recording a jump of over 30%, real estate consultancy firm Anarock said.

Also Read: Energy crisis driving inflation, slowing GDP growth, creating social turmoil: WEF study

Some trends - like hybrid work culture and the need for bigger homes - are likely to stay despite the pandemic impact waning and could spill over into core inflation amid "sticky" rental prices, said Ranjani Sinha, chief economist at credit rating agency CareEdge Group. A housing price index, compiled by the RBI to capture home sales, also shows a steady rise to its highest in over a decade as of the quarter ended September last year.

While housing prices are not part of the consumer price inflation basket, their effect is captured through construction and raw material prices, and analysts do not expect a slowdown any time soon. In fact, housing prices will rise steadily in the next few years, roughly in line with overall economic growth, a Reuters poll of property experts last month showed. Analysts said rising house prices would also feed into higher demand for services like electricity and repairs, ultimately working their way into the overall inflation basket.

This story has been sourced from a third party syndicated feed, agencies. Mid-day accepts no responsibility or liability for its dependability, trustworthiness, reliability and data of the text. Mid-day management/mid-day.com reserves the sole right to alter, delete or remove (without notice) the content in its absolute discretion for any reason whatsoever