Flaws in measuring housing contribution distorting inflation index: Experts

NEW DELHI: Longer duration rent agreements after the pandemic and reliance on house rent allowances for government-owned dwellings to measure rents may be distorting the ability of the housing index within Consumer Price Index to capture true market dynamics, according to economists.

"Month-on-month CPI Housing has been persistently softer than usual seasonal momentum, despite strong urban demand conditions," said Gaura Sengupta, economist, IDFC First Bank.

House rent inflation has been easing since the start of the year and fell to a 19-month low of 3.52% in December, showed data released last week. On the other hand, housing prices have been rising across cities, which experts say should reflect in rent prices.


The National Housing Board's Residex for July-September 2023 showed a 4.9% rise in housing prices across 50 cities. The index further recorded prices rising for 41 of these cities.

House rent inflation is solely calculated from the urban inflation basket and has no rural component. It has a 9.5% weightage in the overall inflation basket. Economists say that government-provided accommodation might be distorting prices. "In the case of government-provided accommodation, rental paid is estimated from the HRA component within the salary of the government employee - which is not a function of market forces, but rather qualitative features of the employee (such as seniority, salary scale, salary increment, etc.). To this extent also, the ability of the housing index within CPI to capture the true market dynamics gets further diluted," said Yuvika Singhal, economist, QuantEco Research. Owner-provided dwellings, mostly by the central government, state governments and PSUs, account for 13.7% of the housing index.

A longer lock-in period may also be a reason for price distortion.

"A possible explanation could be longer tenor of rent agreements with tenants wanting to lock in post Covid-19 low rents," Sengupta said.