House price bubbles and its predictive capacity on inflation and economic growth: Some Indian evidence

• Published date: 01 May 2022
• Author: Manamani Sahoo
• Date: 01 May 2022
• DOI: http://doi.org/10.1002/pa.2464

ACADEMIC PAPER

House price bubbles and its predictive capacity on inflation

and economic growth: Some Indian evidence

Manamani Sahoo

Department of Humanities and Social

Sciences, Indian Institute of Technology,

Kharagpur, India

Correspondence

Manamani Sahoo, Department of Humanities

and Social Sciences, Indian Institute of

Technology, Kharagpur 721302, India.

Email: manamani2626@gmail.com

House price is a key macroeconomic variable that affects decisions made by many

economic agents. This article attempts to examine whether uncertainty or fluctua-

tions in house price affects major macroeconomic variables in the Indian context. It

investigates the long-run effect of house price volatility on inflation (INF) and eco-

nomic growth (EG) by using quarterly time series data for the period 2008–2017.

Auto Regressive Distributed Lag (ARDL) bound test is applied to detect the long-run

relationship between the variables, while Granger causality test is applied to detect

the direction of causal relationship. The ARDL bound test results confirm the long-

run association of house price with INF and EG. Finally, the empirical findings indi-

cate that the house price positively affects INF though it has no influence on EG. The

study suggests that there is a need to discourage house price bubbles in India, which

can help to reduce INF.

1|INTRODUCTION

There are various kinds of uncertainty that intrude on the whole

economy and on the policy process of a Nation. The first type of

uncertainty arises due to occurrence of unexpected events. This type

of shock can originate from international or domestic. The second

type of shock arises due to insularity of the private sector about the

long-run objectives of economic policies. The central bank, supremo

of monetary policy is in turn faced with an uncertainty about many

variables, as it is uncertain about variable response after taking pro-

nouncements and actions. In recent years, there has been increasing

recognition that monetary policy affects the economy, and ultimately

the price level, through a number of channels. The aim of monetary

authority is to maintain stability in an economy with less inflation

(INF) and more economic growth (EG). A well-functioning financial

system can ensure stability in the market. Individual indicators like the

exchange rate, short-term interest rate, asset pricing and so on are

the most important part of monetary policy. The lack of stability of

these variables affects EG and INF of a country. Housing is an impor-

tant subject concern to every economy, as it is considered as a basic

need for all. The spending as well as the borrowing decisions of

households are influenced by change in the house price by affecting

the household's perceived lifetime wealth. Volatility in the housing

market is an important consideration for monetary policy and fiscal

policy to policy makers. Movement of house price is an indicator for

the authorities in formulating their property tax policies. Asset prices

constitute a class of potential useful indicators for INF and EG

because of their forward looking character. The decision related to

purchasing a house is an individual decision of a household to exhibit

a different type of life. Last few years, the reporting of Indian data has

shown an increasing trend. The moment in the housing market due to

many actions both by individuals and the government. The housing

bubble continues in India seen in the last few years mainly due to the

announcement of the Government that there will be provision of

housing for all by 2022. The housing market is influenced by increas-

ing activities of government which increase collateral and hence hous-

ing credits.

While house price bubbles have been known for the last centu-

ries, the recent boom in house price is unique in its pervasiveness.

House price booms have been evidenced in the United States, United

Kingdom, China, Australia, Pakistan, among other countries since the

late 1990s. Housing price booms are mainly due to two decisions, first

one that is a purchasing decision and second one is for consumption

purposes.

Recently, housing price fluctuation makes an important place for

it in monetary policy. Transmission mechanisms of monetary policy

beyond the standard interest rate and exchange rate-channel among

many other channels also affect it, we can focus on housing price due

Received: 8 June 2020 Revised: 7 August 2020 Accepted: 1 September 2020

DOI: 10.1002/pa.2464

J Public Affairs. 2022;22:e2464. wileyonlinelibrary.com/journal/pa © 2020 John Wiley & Sons Ltd 1of10

https://doi.org/10.1002/pa.2464