The Emerging Economy India: The effect of macroeconomic factors on real estate prices in the Indian Property market

Abstract

This master's thesis investigates how the macroeconomic variables GDP, REER, and interest rates influence housing prices in India during the period from 2010 to 2023. Utilizing various models, we conclude that interest rates and GDP affect changes in housing prices. Interestingly, the direction of these effects can contradict economic expectations: an increase in interest rates will increase housing prices, whereas an increase in GDP will decrease housing prices. Notably, the relationship between GDP and housing prices changes when excluding the Covid-19 years, highlighting an expected positive effect on housing prices. This emphasizes how an unexpected economic shock can alter the balance between variables. The shock into the REER showed a behavior change when including and excluding Covid 19. The lower interest rates could explain this during the Covid period and the uncertainty caused by the pandemic. Furthermore, our VECM analysis reveals that there exists a long-term relationship between the variables, and housing prices tend to revert to a long-term equilibrium after deviations. We conclude that GDP, interest rates, and REER influence housing prices, but these variables alone do not fully explain housing price movements.