Rising housing prices and rental costs in India pose a new inflationary concern.
Rising property prices and rental rates in major Indian cities may provide a tough opportunity to the country’s central bank in its fight against inflation, economists warn, even if apparent consumer price increases have largely peaked.
Housing rentals and ancillary expenses account for 10.07% of India’s consumer price inflation basket and are approaching three-year highs, providing a new source of concern for the central bank, which has been dealing with increasing food expenses for the most of last year.
Housing has become slippery and is being actively monitored for signs of second-order consequences, according to a senior source familiar with the Reserve Bank of India’s (RBI) thinking.
According to estimates from the Ministry of Statistics and Programme Execution, urban housing inflation increased to 4.47% year on year in December 2022, up from 3.61% the previous year and 3.21% in December 2020.
However the index dropped sharply from 4.58% in October to 4.58% in November and December, it remained close to its best level since 2019.
Retail inflation in India decreased to 5.72% in December, maintaining within the RBI’s comfort zone of 2%-6% for the second month in a row after lingering beyond the top end for the first ten months of last year.
Nonetheless, overall inflation stayed close to 6%, excluding volatile food and gasoline prices. “Core inflation has remained sticky, therefore an increase in housing inflation offers a considerable risk to the headline inflation forecast,” Bank of Baroda analyst Aditi Gupta said. She pointed out that the non-food basket has borne the brunt of recent inflationary pressure.
According to real estate advisory company Anarock, rents in the top seven cities jumped 20%-25% on average from pre-pandemic levels in 2022, with some of the most popular housing societies seeing increases of more than 30%.
Some characteristics, such as hybrid work culture and the desire for larger houses, are expected to persist beyond the pandemic’s decreasing influence and may bleed over into core inflation because to “sticky” rental rates, according to Ranjani Sinha, chief economist at credit rating agency CareEdge Group.
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