House price dynamics under lower leverage: the case of metropolitan cities in India



This paper aims to examine the dynamics of house prices in metropolitan cities in an emerging economy. The purpose of this study is to characterise the house price dynamics and the spatial heterogeneity in the dynamics.


The author explores spatial heterogeneity in house price dynamics, using data for 35 Indian cities with a million-plus population. The research methodology uses panel econometrics allowing for spatial heterogeneity, cross-sectional dependence and non-stationary data. The author tests for spatial differences and analyses the income elasticity of prices, the role of construction costs and lending to the real estate industry by commercial banks.


Long-term fundamentals drive the Indian housing markets, where wealth parameters are stronger than supply-side parameters such as construction costs or availability of financing for housing projects. The long-term elasticity of house prices to aggregate household deposits (wealth proxy) varies considerably across cities. However, the elasticity estimated at 0.39 is low. The highest coefficient is for Ludhiana (1.14), followed by Bhubaneswar (0.78). The short-term dynamics are robust and show spatial heterogeneity. Short-term momentum (lagged housing price changes) has a parameter value of 0.307. The momentum factor is the crucial dynamic in the short term. The second driver, the reversion rate to long-term equilibrium (estimated at −0.18), is higher than rates reported from developed markets.

Research limitations/implications

This research applies to markets that require some home equity contributions from buyers of housing services.

Practical implications

Stakeholders can characterise stable housing markets based on long-term fundamental value and short-run house price dynamics. Because stable housing markets benefit all stakeholders, weak or non-existent mean reversion dynamics may prompt the intervention of policymakers. The role of urban planners, and local and regional governance, is essential to remove the bottlenecks from the demand side or supply side factors that can lead to runaway prices.


Existing literature is concerned about the risk of a housing bubble due to relaxed credit norms. To prevent housing market bubbles, some regulators require higher contributions from home buyers in the form of equity. The dynamics of house prices in markets with higher owner equity requirements vary from high-leverage markets. The influence of wealth effects is examined using novel data sets. This research, documents in an emerging market context, the observations cited in low-leverage developed markets such as Germany and Japan.


House prices; Panel data; Spatial heterogeneity; Spatial dependence; Stable housing markets


The author would like to thank two anonymous referees for their insightful comments and suggestions that helped to improve the manuscript of this paper. The author has also benefitted from discussions on the Indian housing sector with Shubhranshu Pani, Managing Director, JLL (India). They also thank participants at NMIMS, School of Business Management – Research Seminar, for their comments and suggestions.


Pani, S.S. (2022), "House price dynamics under lower leverage: the case of metropolitan cities in India", International Journal of Housing Markets and Analysis, Vol. ahead-of-print No. ahead-of-print.