Property price has appeared as a leading indicator for real economic activities and macro-prudential measures since global financial crisis of 2007-09 in both advanced and emerging market economies. House price indices are used as a benchmark by property owners and by investors as a means to compare average returns on property and alternative assets such as stocks and bonds. In addition, it has a number of important uses: (i) as a macro-economic indicator of economic growth; (ii) for use in monetary policy and inflation targeting; (iii) as an input to estimate the value of housing as a component of wealth; (iv) as a financial stability or soundness indicator to measure risk exposure; (v) as a deflator of the national accounts; and vi) as an input for consumer prices. Thus, the importance of tracking real estate prices is well appreciated by the policymakers and regulators all over the world.
In recent time, academics and policymakers became concerned about the nature of property price dynamics and its role in maintaining financial stability as well as price stability. Policy makers need to identify the sources and nature of property price fluctuation in order to maintain price stability. Moreover, it is crucial for formulating monetary policy, financial regulatory purposes and financial stability. The International Monetary Fund (IMF) proposed a set of Financial Soundness Indicators which includes real estate prices, and the ratios of residential real estate loans and commercial real estate loans to total loans.
Property price affects the economy through three main channels. First, property prices affect private consumption through their impact on household wealth. Second, it affects housing investment and the construction industry, which tend to have relatively huge multiplier effect in the economy. Finally, these channels tend to be reinforced through the financial accelerator effect, as real estate use as collateral, thereby also affect the banks' balance sheet and their willingness to extend credit to the real economy. Therefore, in order to understand the price behaviour of real estate market and its impact on the economy, it is important to get a reliable house price movement.
CONTRIBUTION TO GDP: Real estate sector is a big driver of economic growth as this sector has enormous multiplier effect on economic activities. Besides real estate market, this sector also stimulates demand for its backward and forward linkage industries. Moreover, real estate now provides a sound platform of employment for engineers, architects and designers. It is one of the largest employment-generating sectors after agriculture and readymade garments. Most of the labour force engaged in the construction sector serve the real estate sector since the real estate sector is a major part of the construction sector. According to the Labour Force Survey 2017, of Bangladesh Bureau of Statistics (BBS), 2.1 per cent of the labour force was engaged in this sector in FY00 which stood at 5.5 per cent in FY17. Over the last few years, this sector has shown a vital role in the national economy, on an average around 8.0 per cent of GDP and this sector along with its backward and forward linkage industries contributed about 12-14 per cent. Additionally, every year this sector directly adds to the government revenue (in the form of VAT, registration fee, utility fee etc) on an average nearly Taka 5.0 billion
The performance of the real estate sector is difficult to gauge because of dearth of information; many transactions are kept confidential. According to Real Estate and Housing Association of Bangladesh (REHAB), 3.5 million people are engaged in this sector, where 269 backward linkage industries are also associated. Besides, more than 100,000 architects, graduate engineers, diploma engineers, management professionals and skilled manpower and 50 million workers are providing labour in this sector. In addition, currently demand for housing is the highest in Dhaka city, as a result 98.0 per cent of real estate developer companies operate in Dhaka and only 2.0 per cent have operations outside Dhaka.
If this sector is affected severely, there will have a negative impact on its linkage industries as well as on the overall economy in the long run. Therefore, considering the importance of the real estate prices on real economic activities and macro-prudential regulations, we attempt to calculate a residential price index (RPI) for Bangladesh real estate sector.
ANALYSES & FINDINGS: The real estate sector in Bangladesh has expanded over four decades. Meanwhile, the real estate business has been flourishing in Dhaka city and achieved remarkable growth. The average price of apartment in Dhaka city has started to increase since 2006 till 2012Q3 (Chart-1). The price movement increased but started fluctuating during 2012Q4 to 2014Q3. Afterwards, flat price declined may be because most developers decreased flat price about 15-20 per cent during the period to boost up the sale of flats. It started to increase after 2017Q4 which continued up to 2020. It may be noted that the flat price increased threefold in 2020 compared to 2000 as a result of significantly rising price of construction materials, land price and registration cost. At present registration cost is 10 per cent in Bangladesh which was 14 per cent and the registration cost is still higher than that of other Asian countries. If the registration cost is brought down to 5-6 per cent, the government will get higher revenue, and VAT collection from this sector will also increase. However, flat price decreased slightly after 2018Q2 and the market started to stabilise. This stability was good for the sector and the buyers gradually returned to the market.
On the other hand, flat sale increased since 2003 to 2010Q1. It may be mentioned that flat sales increased eightfold in 2010 compared to 2000 due mainly to the fact that during the period a significant number of the buyers were non-resident Bangladeshis and foreign remittances have been a major source for apartment purchase. Most of the surveys indicate that after food, the second most important use of remittances is home construction.
After 2010, flat sale fell significantly mainly due to discontinuation of Bangladesh Bank's refinance scheme in 2011, liquidity crisis in the banking sector, stock market crash, declining trend of remittance growth, political unrest and disruption of gas supply connection in the new apartments. In addition, house finance facility was provided at a maximum debt equity ratio of 70:30 in 2012 from 80:20 in 2004.
However, flat sale regained after 2015Q3 and continued up to 2017Q3 as a result of fall in flat price, lower return on fixed and saving deposit, and house finance facility by the Bangladesh Bank increased at a maximum limit of Tk.12 million in 2015. Flat sale decreased drastically after 2017Q3. At the beginning of 2018, the government declared housing loan facility of Tk 3.0-7.5 million to its employees with 5 per cent interest rate instead of Tk 120,000 with 1.2 per cent interest rate as home loan to its employees since in 1982 which was implemented from FY19. After 2019Q4, flat sale fell significantly due to the Covid-19 pandemic.
Size-wise flat price indicate that (Small: 500sqf-1000sqf, Medium: 1001sqf-1800sqf, Large: Above 1800sqf ), price of large flat is higher than small and medium (Chart-2). Reason behind the high price of large flat is that most of the large flats are located in Banani, Gulshan, Baridhara or Dhanmondi area where land price is high and the facilities of large flat is better than those of small and medium size flats. From Chart-3 it is evident that sale of medium size flat in Dhaka city is higher than that of small and large. There are some socio-economic reasons behind the strong demand for the medium size flat. The most important one is the change in family structure and income level. Besides, Bangladesh Bank started a refinance scheme of Tk. 1.5 million (up to 1250 per sq-feet) for real estate sector in 2008 which helped meet housing demand of middle income people.
Study finds that house price has not fluctuated much over the years. Chart-4 depicts the comparative position of residential price index of Dhaka city in weighted average (laspeyres) and hedonic regression method (time dummy moving average) methods. The Chart shows that the movement of price index (laspeyres method) was increasing till 2012Q3 and after that it fluctuated. However, the price index shows upward and less fluctuating trend in hedonic regression method (time dummy moving average) as this method includes several characteristics other than price. In this method we consider per square feet price (Natural log) as dependent variable and size (small, medium and large) and location as independent variables, as they influences house price.
CONCLUSION: The objective of the study is to calculate residential price index in Bangladesh. Secondary data on residential price for the period 1998Q3-2020Q2 have been used for the study. The RPI calculated in the study captures the quarterly movement of residential prices in Dhaka city. The residential price index showed an increasing trend over the period but declined after 2014Q3 and started to increase after 2017Q3 till 2018Q2. Afterwards the price index fell and showed stable trend till recent time.
It is worth mentioning that these indices are estimated by using data obtained from a single financial entity (DBH) and the data covers only Dhaka city. Hence, the estimates give a partial picture of residential price dynamics scenario, which is a limitation of the study.
Mst Nurnaher Begum is Deputy General Manager (DGM), Monetary Policy Department; Mohammad Shahriar Siddiqui is DGM, Banking Regulation; Md. Ahsan Ullah and Sadia Sultana are Joint Directors of Monetary Policy Department, Bangladesh Bank.
nur.begum@bb.org.bd
[The article is an abridged version of a study paper titled 'Movements of Residential Prices in Bangladesh: An Empirical Analysis' published in the Monetary Policy Review 2020.]