Identifying Asset Price Bubbles in the Housing Market in India - Preliminary Evidence

Devoted to the analysis of housing market in India, the paper employs a special decomposition scheme for the structural VAR proposed by Blanchard and Quah to study the impact of permanent shocks to housing prices attributed to monetary variables and income growth - and, in the process, attempts to identify speculative price bubbles in the housing market. Based on the monthly data, the empirical evidence obtained in the paper suggests that the housing market in India at present remains fairly well equilibrated if seen in terms of the proximity of the actual housing prices and the estimated long run equilibrium housing prices. This implies that the risk of speculation in the market is not yet materially significant. However, as a mark of caution, the stance of monetary policy particularly that reflected by the setting of the policy rate appears to be the single most important arbiter of the future growth of the housing market. [RBI Occasional Papers, 2006]