An Empirical Study of the Trends in Real Estate Prices in Chandigarh (India)

By

Bharat Mittal

2007

A Dissertation presented in part consideration for the degree of "MA Management".

TABLE OF CONTENTS

Table of Contents ...2 Acknowledgements .3 Abstract ...4 Chapter 1: Real Estate Scenario in India .5 Chapter 2: Real Estate Scenario in Chandigarh .9 Chapter 3: Literature Review (Cobweb Model) 12 Chapter 4: Literature Review (Real Estate Cycles)..19 Chapter 5: Methodology ..27 Chapter 6: Analysis and Discussion (Section 1) 31 Chapter 7: Analysis and Discussion (Section 2) 39 Conclusion 48 Appendix ..50 References 65

Acknowledgements

I would like to acknowledge the support and guidance of the lecturers and staff of Nottingham University Business School. My appreciations go especially to my supervisor, Professor Peter Swann, for the directions and suggestions he gave me to achieve this dissertation.

I would like to express my gratitude towards my family for their support and complete confidence in me. Grandpa, grandma, mom, dad, and bro, they have all been my inspiration.

I would like to say a special thank you to all my friends for their invaluable care and good wishes and especially my dear friend Gauri for not letting me loose focus of my aim and keeping me sane throughout the year.

Finally to all the people that I have been fortunate to meet this year, thank you for making it an experience to remember! You have all worked hard and I hope all your wishes come true.

ABSTRACT

Indian real estate has huge potential demand in almost every sector especially commercial, residential, retail, industrial, hospitality, healthcare, etc. Commercial office space requirement is led by the burgeoning outsourcing and Information Technology Industry. The leaders of the IT/ITES world have set up or are setting up their centres in India. Estimated demand from IT/ITES sector alone is expected to be 150mn sq. ft. of space across the major cities by 2010. In residential sector there is housing shortage of 22.4 million units out of which 6.7 million are in urban India. The increase in purchasing power and exposure to organized retail formats has redefined the consumption pattern. As a result the country has experienced mushrooming of retail projects across the cities. The main growth thrust is coming due to favourable demographics, increasing purchasing power, existence of customer friendly banks & housing finance companies, professionalism in real estate and favourable reforms initiated by the government to attract global investors. All these factors have resulted in increased attention of global investors towards Indian real estate than ever before.

By using data collected from property dealers and consultants in Chandigarh, we will study trends in prices of land in Chandigarh, its suburbs (Zirakpur) and rural areas. We will also study how the housing market has behaved in Chandigarh over the past 10 years.

CHAPTER 1: REAL ESTATE SCENARIO IN INDIA

Several global and local factors have converged over the last few years to culminate in the huge interest in Indian real estate exhibited by global and domestic investment funds. While India has been the flavour of investment globally for some time now, it has taken almost ten years, for Indian property to evolve, after a full cycle and consolidation, before it has come squarely under the international spotlight a brief description of the real estate scenario in India may explain why study pf real estate price trends is desirable and interesting.

The real estate market has been on a growth and expansion phase ever since 2002, after it emerged from a phase of consolidation since the correction of the late 1990s. In the years of resurgence, the transformation of the Indian real estate sector has been more or less organically driven by consistent growth of the economy and business, growing incomes and aspirations as well as enthusiastic supply response. Investors irrespective of the fund base they have want to invest in real estate in India to guarantee them selves a safe a handsome return throughout their lifetimes.

The need for developers to continually expand in a competitive environment and acquire land tracts for achieving bigger size, meant recourse to large fund corpus at competitive rates. This led more and more unlisted real estate companies to consider seeking recourse to the capital markets through the initial public offer (IPO) or rights issues. Apart from seeking recourse by listing on Indian stock exchanges, real estate companies have found an alternative funding route in the Alternative Investment Market (AIM) of the London Stock Exchange. Listing on AIM gives companies

access to liquid global funds at close to international lending rates, flexibility of listing companies abroad and achieving an international profiling. Along the way, domestic banks and financial institutions have also altered their view towards lending to the real estate sector. Government has also formulated various positive policies in the real estate sector. Opening the door for the foreign investments, the first real estate Foreign Direct Investment (FDI) policy was announced in 2002, which permitted FDI up to 100 per cent for development of integrated townships, including housing, commercial premises, hotels, resorts, city and regional level urban infrastructure .
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As a result of which, the growth of the real estate market in India is staggering to say the least. The $15 b realty market is expected to reach $ 90 b within the next 8 years. The rise of the middle class ( 500 million ), Non Resident Indians investing in Indian realty, Foreign Direct Investment entering the market, expansion of Multi National Companies and Indian multinationals, proliferation of educational institutions, growth of IT, BPO, food processing & health care - all these are the factors responsible for the growth of Indian realty. Chandigarh, Gurgaon, Vizag, Coimbatore, Kochi, Jaipur, Nagpur are some of the medium sized cities witnessing unprecedented boom. The Indian GDP is growing at 9.1% and India has already opened up the Realty, Agri and Retail sectors. Research has it that realty can give an average return of 8%. Realt y prices are doubling in most of the big cities like Bombay, Chennai, Bangalore, etc. Residential prices have gone over Rs 5000 per sq feet and commercial prices are over Rs 10000 in big cities. It has been predicted that the top six economies of the world in 2050 will be China, USA, India, Japan, Brazil and Russia (Goldman Sachs) . In the
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Trammell Crow Meghraj Property Consultants Pvt. Ltd. Release : 20th March 2007 http://www2.goldmansachs.com/insight/research/reports/report6.html (accessed on 28th, July 07)

case of India the most prominent contributor to the economy will be the real estate market. According to a report , The residential property market constitutes almost 75% of the real estate market in India in terms of value. As per the Tenth Five Year Plan there is a shortage of 22.4 million dwelling units out of which more than 70% dwelling units are for middle and low income brackets. Additional requirement of housing per year during the plan period 2002-2007 has been estimated at 4.5 million units per year. The India Governments habitat policy envisages that by the year 2012 the housing shortage should be removed and everybody should have a house of his own. To meet this target the estimated investment involved is approx. Rs.400, 000 Cr. or say US $ 800 billion up to 2012. This indeed is a tremendous opportunitythere is great demand for modern office buildings in India. The demand for new office spaces alone has grown from estimated 3.9 million sq. ft. in 1988 to over 16 million sq. ft. in 20045. Cumulative demand for office space in India from 2005-2008 is estimated to be in excess of 85 million sq. ft. This represents an annual growth rate of 14.5 % over the next three years or approx. 20 million sq. ft. per year. Approx 80% of this demand is created by IT & BPO sectors. ITES contributes 28% of the total software service export from India during the year 2004. ITES and BPO segment registered a growth of 54%. NASCOM and McKinsey study has predicted that ITES sector in India will provide additional jobs for over 1.1 million people by 2008 which translates into space requirement of approx. 100 million sq. ft.
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International Real Estate Summit FICCI, New Delhi : 11th & 12th November 2005.

The run-up in prices in real estate has attracted the likes of Morgan Stanley, which has invested $68 million in Mantri Developers, a midsized construction firm in Bangalore, and Merrill Lynch, which invested $50 million in Panchsheel Developers, a regional builder. Foreign companies have also poured money into funds that invest in Indian developers. GE Commercial Finance Real Estate, for example, has invested $63 million in an $800 million fund that is building IT parks, and Calpers and the Oregon Public Retirement Fund have invested $100 million each in the IL&FS India Realty fund. Real estate funds set up to invest only in India have already raised more than $2.7 billion. And new funds worth as much as $4 billion are being planned by J.P. Morgan, Britain's Knight Frank, and other foreign investors. Warburg Pincus, the largest private-equity investor in India, says it is spending nearly a third of its time studying opportunities in this area.

The real estate funds are not just restricted to the traditional large metropolitan cities, when it comes to sourcing investment opportunities. Despite the fact that these funds have been on ground for just over a year, real estate funds are seeking opportunities even in smaller metro cities and towns which is indicative of the availability of opportunities in smaller towns and the flexibility of funds to consider the same.

CHAPTER 2: REAL ESTATE SCENARIO IN CHANDIGARH

Our research and data will primarily focus on real estate prices in areas in and around Chandigarh. Information technology, industries, retail, growing income, increasing population, etc have played a critical role in the development of real estate in Chandigarh. Rated as the most prosperous state by real estate experts based on current trends, a large disposable income among the city's residents has prompted builders to draft commercial, retail and residential spaces in the city.

Stretching the Chandigarh real estate story to Mohali, Zirakpur, Dera Bassi and Panchkula (cities and sub urban areas around Chandigarh), in particular, these cities have attracted entrepreneurs, resulting in an ever-deepening ring of industries all around the city.

Chandigarh shares the platform with Mysore and Kolkata for a large share of commercial property development in the country in the next couple of years. As the IT industry expands, the demand for commercial space will only grow. Enjoying the highest per capita income in the country at Rs.67, 350, the retail business has great potential for expansion and hectic construction activity by real estate developers is taking place. Hotel projects and malls are on the anvil by most prominent builders.

Prominent builders from the NCR have set up base in Chandigarh and its fringe towns with mega projects and are confident of reaping fast returns. Omaxe, Ansals, DLF, Realtech, Parsvnath, Chadhas, Jaipurias and ATS have a mix of residential townships,

commercial spaces, retail malls, hotels and IT park projects in various stages of construction in Chandigarh and its suburbs. DLF is offering 1.5 lakh sq ft of built up non IT space for commercial use, while four acres has been allocated for the hospitality sector. Moreover, DLF IT Park in Chandigarh on 7 lakh sq. ft area is fully operational, to be integrated with a retail arcade, entertainment centre, food court, banks and a health centre.

Panchkula and Zirakapur in the south, Mohali to the west and Baddi are the hotspots for real estate developers. Zirakpur and Baddi as discussed earlier and as our study will prove has been the area with maximum appreciation. They form the urban rural fringe outside Chandigarh and include land along the boundaries of a cit y, in the suburbs, in small incorporated towns near the city and extending into the unincorporated, partially developed countryside surrounding the city. It is the area where land is in transition from agricultural to urban use (Hushak, 1975). Integrated projects on townships up to 200 acres are being designed in these areas to meet international standards. They offer a pollution-free, fully serviced environment and are good purchases, either for personal use or investment. Independent plots are available for building customized homes, with the added advantage of facilities within the township.

Chandigarh has all the ingredients for a perfect investment. A supportive government, an affluent and upwardly-mobile populace, abundant land, excellent infrastructure, a clean, non-polluting environment, and of course, the thriving IT industry, are all working in tandem to create one of the most modern cities of North India. All these

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factors add up to make Chandigarh and its surroundings an attractive option for investors concerned with real estate and arguably makes it an interesting topic to research.

In this study, we will divide the analysis of data in to two sections. The 1 section will consider the 10 years quarterly data on house prices, number of houses on sale and number of houses being traded in the market. In the 2
nd

st

section we will analyze the 5

years quarterly data on land prices in Chandigarh, Zirakpur and rural areas.

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CHAPTER 3: LITERATURE REVIEW

Cobweb Model history

Cobweb Model is an economic model of cyclical supply and demand in which there is a lag in producers response to a change in price. It is sometimes called the hog cycle, a reference to the fluctuation of American pig prices in the 1930s. The cobweb model was developed by the Hungarian economist, Nicholas Kaldor . The originators of the theory followed the same basic idea of carrying successive production, price, and production readjustments back and forth between the supply and demand curves (Ezekiel, 1938). Schultz (1930) demonstrated the cobweb by presenting one example, of the convergent type and also plotted the resulting timeseries of prices and quantities. Tinbergen (1930) analysed the theory more completely by presenting both the convergent and divergent types. Ricci (1930) presented diagrams of all three basic types, convergent, divergent, and continuous.
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Ezekiel (1938) introduced the cobweb model as a theorem for pricing and production. This model was based on Moores (1917) study that did a research on forecasting the production and the price of cotton. On the same lines Hanau (1928) researched and found that current hog prices in Germany reflected current hog production while current hog production was influenced by previous hog prices. Figure 1 shows a simple cobweb model which depicts how current prices are related to current production whereas current production is based on the prices of the previous years.

http://en.wikipedia. org/wiki/Cobweb_ model (accessed on 1st, August 07)

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Figure 1 . Simple Cobweb Model

Akerman (1957) provides an interesting explanation to the cobweb theorem by stating that it presumes an original state of equilibrium at a given price between demand and supply of some commodity. The theory assumes that in this situation some sort of disturbance occurs which gives rise to a discrepancy between actual demand and supply. It then goes on to examine the resulting price and production movements.

Converging and Diverging models

Waugh (1964) explicitly explains the two different types of cobweb models that is, 'converging and diverging (see figure 2). The basic difference between these two

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models is that in the converging model, the fluctuations in price and production get smaller and smaller over time whereas in the diverging model the fluctuations in price

Figure 2 . Three Linear Cases and production gets bigger and bigger and with the passage of time. A simple concept behind these two models is that it will converge if the lagged output curve is steeper than the price curve and it will oscillate continuously if the slopes of both the curves are equal on the other hand, it will diverge if the price curve is steeper than the lagged output curve.

In simple terms, if the price elasticity of demand is less than the price elasticity of supple, the fluctuations would increase in magnitude per cycle which is referred to as an unstable cobweb model. On the contrary, if the price elasticity of demand is more than the mean price elasticity of supply, fluctuations decrease in magnitude per cycle

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which is referred to as a stable cobweb model. If there is unit elastic price elasticity of both supply and demand then a plot of the equilibrium would produce a simple quadrangle.
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Harlow (1960) explains that, a large supply and low price in one period will be followed by a small supply with an accompanying high price in the next period, which in turn will be followed by a large supply and a low price in the succeeding period, and so on. Assuming there are no external influences, these fluctuations will either increase or decrease in amplitude, or continue at the same level indefinitely depending upon the slopes of the demand and supply curves.

According to Harlow (1960), the application of the theorem depends upon the fulfilment of three conditions. (1)Producers plan for output in the next period on the basis of present prices. (2) Once production plans are made, they are unalterable until the following time period. (3) Price is determined by the available supply, i.e., price is set by the intersection of the demand curve with a vertical supply curve. The model assumes that the producers are extremely short-sighted and unable to judge market conditions or learn from their pricing mistakes. Collery (1955) provides some possible situations that can be present in the real world. Instead of assuming that the producers will expect the price in future to be the same as current period it is quite possible that producers anticipate future prices based on the prices of the past and their forecasts can be accurate, higher or lower when compared to actual prices.

http://en.wikipedia. org/wiki/Cobweb_ model (accessed on 1st, August 07)

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Cobweb model was primarily introduced to forecast the agricultural production and price but agricultural production was never completely determined by the producer's response to price and the market price was never set solely by the supply available. Other factors such as weather (Akerman, 1957) and technology also affected output. And such factors for example, changes in population and consumer incomes, changes in import duties, affected demand. That is, cobweb model so far discussed is a two dimensional model and ignores the effect of these external factors. But Ezekiel's restriction to conditions of pure competition and his exclusion of cases in which either price or production is set by administrative decision, raise questions as to the applicability of cobweb models in the modern world (Waugh, 1964). He further

argues that most governments now have active programs to maintain farmers' incomes by supporting prices, by limiting production or marketing, or by purchasing surpluses and diverting them to non competitive markets. Thus, even agriculture today operates under conditions that depart significantly from those of pure competition. Though other factors are important and can have an effect on the price or production of a product but they cannot replace the effect of these primary factors on each other.

Waugh (1964) supports his argument by explaining how a price or a production support system in the modern world puts a kink in the in the curves (Figure 3). It is important to emphasize on this point because in our case, where we are looking at fluctuations in real estate prices, there are possible dynamic world influences that can put a kink in the cobweb model. These forces can be government regulations, a sudden rise in demand because of surplus funds, and many more. The basic assumption of the cobweb model that price curve and lagged production curve are

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each fixed through time (Waugh, 1964), should be clear in our mind before we proceed further with our study.

Figure 3 . Price Suppo rt Models

Another essential aspect of the cobweb theorem like the one discussed above, is the factor of lag that affects the length of the cycle (Harlow, 1960). The length of the cycle produced by the cobweb theorem depends upon the time required for a change in price to affect supply. In case of hog production, this cycle is usually two years with production rising and falling based on the changes in prices. Harlow (1960) shows that this will produce two different path ways for odd and even years, theoretically (see figure 4) though in reality this is not true. Similarly, there will be a lag of 4 years when if we study the supply and demand of new engineers for jobs (Freeman, 1976). This is because of a fixed time delay between the decision to enrol

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in engineering (or any other field) and entrance in to the labour market. With supply dependent on past conditions and salaries on current conditions, the models have recursive structures that produce endogenous fluctuations. To test the general validity of the model, Freeman (2001) undertook a similar study on new law school graduates. This profession differs greatly from engineering and other sciences but has a similar fixed time delay in producing new specialists. The study produced similar results that students getting enrolled for law in a particular year depend on the economic condition of the profession in that particular year and the salaries of young lawyers are inversely related to the number of new graduates.

In our case, a hike in price or a change in demand at any point in time will alter the supply of flats or office space approximately one year from that point in time. This is obviously because of the lag present from the point in time a producer takes to increase supply to the time his/ her product actually reaches the market which is usually one year in real estate. This is so, as it involves purchasing land, completing legal formalities and then completing the construction process before it is actually ready for sale.

What is interesting to note is that in India and primarily in areas around Chandigarh, builders decrease this lag period to as much as 4 months by actually putting their products on sale before the construction of the property has begun. This is done by collecting a booking amount from prospective buyers a signing a deal at present day prices. The deal has the payment plan that the customer has to abide to and the completion date for the builder. By doing so, the producer is able to benefit from the increase in price or the demand of the product.

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CHAPTER 4: LITERATURE REVIEW

Real Estate Trends

Land and real estate have the unique characteristics of being simultaneously a major input into production activities (agriculture, industry, and services), and into consumption by households of residential real estate and infrastructure services. For agriculture, land is the most important factor of production. For enterprises, especially of small and medium size, land and real estate are the largest cost centre second only to labour. For poor households, land and real estate are the single most significant vehicles for saving and the largest item of expenditure (Galal and Razzaz, 2001).

Literature and research related to real estate cycles, appreciation, trends, etc around the globe is not readily available and more importantly there is a serious lack of research about real estate trends, etc specifically in India. The real estate industry is cyclical in nature but the cycles are neither regular nor predictable. Moreover, the amplitude and frequency of the cycles differ from place to place and time to time (Brown and Liu, 2001). What furthers hampers research into this field is the fact that real estate cycles are difficult to characterize because of varying severity across different real estate sectors. For example, a downturn in residential markets by no means implies that commercial real estate market is also facing a depression (Dokko et al, 1999).

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There is also a general perception or belief that real estate markets are inefficient and imperfect relative to the financial markets. Kang and Gardner (1989) provide a few reasons to this problem. They say that buying and selling real estate is a matter of negotiation for each transaction. If maximizing the present value of the selling price were the only objective, a seller would continue to search for potential buyers until the marginal benefit is equal to the marginal cost of another search. Yet a seller must accept or reject a buyers offer without knowing when or even whether, there will be another offer. In addition, sellers often have a second objective: to sell quickly in order to move to a new location. Thus, they may accept a price less than the maximum that they could obtain if they waited longer. Knowing these constraints, some sellers may deliberately overprice their houses, accepting to sell at a discount but allowing for the possibility of a higher- than- expected offer. Further complicating the situation is the fact that the housing market reacts relatively slowly to new information on other sales because it is costly to obtain. Thus, one observes that some properties may take longer to sell than others of equal qualityp. 21).

Macroeconomic research

Taking a broader view of the market, real estate cycles have been a significant underlying reason for the financial successes and failures of real estate investments throughout history. Cycles are a major determinant of success or failure because of their pervasive and dynamic impacts on real estate returns, risks and investment values over timeimpacts that should not be ignored or over-simplified (Pyhrr et al, 1999). In the recent past, research related to real estate was considered extraneous and was generally ignored. Phyrr et al (1999) provides various reasons why some people

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believe that study of real estate cycles and trends is better ignored. Some of them being; economic forces are random, lack of investor interest in cycles, financial theory does not address cycles, inadequate data, diversification eliminates cycle effect, etc. but gradually over time, researchers have realised the importance and significance of real estate cycles. This pattern of periodic cycles of over- and under building, increase in demand and lack of demand or rise and fall in prices may appear to be a prime example of a cobweb or com-hog cycle.

In the past twenty five years, research into real estate cycles has witnessed a positive change with researchers realizing the importance of real estate cycles and growth. It has a prominent link with the financial cycles of an economy because of the dominance of housing and real estate in total wealth and the sensitivity of these markets to interest rates. According to the Survey of Consumer Finances of the Board of Governors of the Federal Reserve S ystem (1995), real estate accounted for 56 percent of the total wealth in 1992. Thus, movements in property prices have substantial effects in aggregate fluctuations (Chinloy, 1996). Research into real estate cycles is present at both macro and micro economic level. Literature available on macroeconomic cycles gives contradictory opinions as different durations of an average real estate cycle are stated by different researchers. An early pioneer of long real estate cycle research was an American by the name of Roy Wenzlick, who published one of the first real estate periodicals, The Real Estate Analyst (Rabinowitz, 1980). Wenzlick charted long cycles of housing transactions from 1795 through 1973 at the national level, and concluded that the average length of the long cycle was eighteen and one-third years. e.g. an 18.3 year cycle (Rabinowitz, 1980), On the other

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hand, Downs (1993), reports that longer cycles e.g. 30 year or 50 to 60 year cycles can exist in the real estate market.

As Kondratieff (1928) explained it, severe economic depressions come at fairly regular forty-five to sixty-year intervals, and are followed by another long surge of business activity that results in a new peak of economic output and prosperity. Kondratieff also identifies temporary setbacks, known as recessions, which occur regularly after twenty-five to thirty-five-year period cycle. Grebler and Burns (1982) analyzed total construction, public construction, private construction and residential property construction over the period from 1950 to 1978 and found six cycles in residential construction and four cycles in non residential construction in the U.S. for the above said duration.

Research at the macroeconomic level as discussed above also emphasizes on the role of national economic cycles on real estate investment performance. Two works completed by Roulac are prime examples of national economic cycles linked to real property. Roulac and Sobolik (1985) study evaluated the ex post impact of tax reforms on real estate performance. Later, Roulacs (1993) perspective view of twenty-five years of real estate business provided a general philosophical examination of important cyclical relationships that existed and might be expected to be important in the future. He evaluated real estate markets influenced by the economy, office demand, office construction, property values, volume of transactions, capital for real estate, investor interest and tax climate factors. The vitality of capital flows to commercial real estate was categorized for pension funds, financial institutions, foreign investments, securities and corporate investments.

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Microeconomic research

Literature more relevant to our topic is the one that studies real estate cycles at the microeconomic level. Born (1984) demonstrated that cyclical inflation can produce performance results that are significantly different from results using a constant inflation rate. Hekman (1985) studied the office sector in fourteen cities over a fifteen year period (1979- 1983) and found that construction was highly cyclical when the areas studied were aggregated.

Looking at the residential sector Clayton (1996b) evaluated the quarterly time series of prices of single-family detached housing over a period of 13 years (1979 to 1991) in Vancouver, suggesting that housing markets are characterized by irrational expectations that, at times, deviate from fundamental values. In a follow-up study, Clayton (1997) evaluated condominium housing price cycles during 19821994 in eight submarkets in Vancouver has produced similar results that significant evidence against rational expectations was obtained in condominium housing prices since prices deviated significantly from fundamental values over the real estate price cycle. House price changes moved in the opposite direction from rational expectations in the test of an efficient asset market model.

In a similar study by Wheaton (2005), condominium prices in New England behave opposite to rational expectations. Just after a surge in the demand, the prices fall because of excessive new development, which eventually settles down after two or three years. This is so because, resort supply responds so elastically to any movement in prices, that it effectively curtails any long-term property appreciation. Developers

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and informed agents buy just after the shock and sell two or three years later (just when the shock returns). Given development and marketing lags, these projects typically take two to three years to finish and hence sell out at the price peak. Downs (1993) work also sheds light on the difference in equilibrium vacancy rates in different markets which is due to fundamental differences in market supply and demand conditions in those markets. He argues that, because some markets contain a higher proportion of rapidly growing firms, or are experiencing more rapid population growth, dynamic markets will have higher vacancy rates than static markets.

Another field of research that has made its presence felt in the recent past is establishing a link between property prices and inflation. Over the past 25 years, there does not appear to be a very strong link between nominal returns on commercial property and contemporaneous inflation. The correlation coefficient over that phase is actually slightly negative (0.05) but is so minute that the most sensible analysis is that there is effectively no direct link between nominal returns on commercial property and general price rises. Returns on commercial property are much more sensitive to changes in real economic conditions movements in total real incomes than to movements in inflation. Hence, the notion that investment in commercial property becomes less attractive in a time of low inflation is consistent neither with the historical record nor with analysis of the economic forces at work (Barber and White, 1995), (Miles, 1996). On the hand, residential property has performed exceptionally well when compared to commercial property. But that too is not very popular with institutional investors as uncertainties over rent controls and legislation on rental agreements have made investors willing to forfeit gains from sharing in the rise in residential property prices (Miles, 1996). Contrary to the results of Miles,

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Kaiser (1997) reports that there is a general price inflation preceding and accompanying a rapid rise in property prices and gives the example of boom/bust of the 1920s that came just after the inflation spike of 191820, and the recent boom/bust was preceded by the high inflation of 197381. Moreover, immediately following both inflation peaks, the early reaction in real estate was a period of strongly improving net operating income and property value increases.

Similar to the above discussion, literature gives a significant importance to the level of interest rates in determining the real estate trends of a particular period. Low interest rates during the last few years, has been the primary reason for record-level home sales and new construction, along with loan refinancing, has helped pull the U.S. out of a recession. GDP and employment grew, and as a result, in 2004, soaring home values and rising stock prices drove the wealth of American households up by 9% to a record $49 trillion, states the Federal Reserve. In the Indian real estate scenario also some of the reasons for the boom in demand for housing sector are easy availability of finance form the housing finance companies and banks and lower interest rates. A recent announcement of increasing the interest rates by the Finance Minister, Mr. P Chidambaram is expected to affect the real estate market in the coming years. The surge in the prices of houses in U.K. is also being blamed on the lendings to this sector, interest rate structures and most importantly building societies. Johnson (1979) states that the building societies, due to their lending patterns and interest-rate structure, are principally to blame for the major variations in prices of houses during the past ten years and claiming that such occurrences, by and large, coincided with periods when the societies were providing funds at record levels.

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The societies during the 1950s and 1960s have grown up to become major financial institutions, providing at present 86 percent of the finance for private house purchase.

Another important and most directly linked factor to real estate trends is the ability of the people to pay for land. I feel that this is the primary factor that is leading to the real estate boom in India and mainly in and around Chandigarh as there is a sudden rise in industrial clustering, IT services and other infrastructure that leads to rise in income of the people. In United Kingdom, over the period 1960 to 1970, real income was rising on a steady trend with cyclical fluctuations around this trend. Then from 1971 to 1975, larger and more erratic fluctuations in real income emerged, while during this same period house prices more than doubled (Nellis and Longbottom, 1981). This is an extremely important point, and I stress it again that the rapid rise in house prices could have been partly caused by the increased ability of people in this period to pay for bigger and better houses.

Focusing on our research, which is related to the cobweb model of demand/supply and price/production, we see that literature provides us with studies on real estate cycles and vacancy rates. Grenadiers (1995) work on real estate cycles provides insight into the causes of the mismatch between supply and demand that result in prolonged periods of abnormally high vacancy rates, which are followed by periods of abnormally low vacancy rates. Factors like demand uncertainty, adjustment costs and construction lags lead to the phenomena of real estate cycles and cycles in the level of vacancy at any point in time.

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CHAPTER 5: METHODOLOGY

Research Objective

As every research study is conducted with a clear purpose, it is necessary to comprehend the research objectives of this study also. Although there are a large number of studies relating to real estate trends around the globe, but there is a serious deficit in the number of studies on real estate in different parts of India. So, I conducted this research in order to gain insight into property prices and study the trends in the capital Punjab and Haryana (two of the most prosperous states of India)
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as Chandigarh has been the focus of attention of real estate investors for the last decade or so. Hence, I feel studying the trends of real estate prices in and around Chandigarh and the development of housing market will be and interesting and as well as challenging topic for my dissertation.

Research Methodology

This study is based on an exploratory form of research. We will collect data related to real estate in and around Chandigarh and try to analyze and infer maximum possible information from the data. Quantitative research methodology is used for the research because of the objective nature of the research. Quantitative data is best suited for studying trends of real estate prices, number of new houses that are ready for sale, number of houses being traded in the market every year, etc. The research methodology selected for a research is a topic of debate with abundant literature

Chandigarh is the capital city of both Punjab and Haryana and is a Union Territory in itself.

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present (Sinkovics et al, 2005), (Stenbacka, 2001), (Cassell, 2005), (Milliken, 2001). But we cannot get into that discussion because of space limitations.

Data Collection

When I started out to look for data on real estate for the last decade the most obvious choice was to look at the property price indices. But as I mentioned earlier, property research is not very famous in India, and the only property price index available in the country is presented below.

CITY DELHI MUMBAI KOLKATA BANGALORE BHOPAL

2001 100 100 100 100 100

2002 106 116 115 133 120

2003 129 132 129 170 136

2004 150 149 148 224 154

2005 201 178 172 275 179

The National Housing Bank (NHB) launched this housing price index on July 11 , 2007 and we can see that the information available is not sufficient for our research. Moreover, being the first housing price index in the country they have only looked at 5 cities for the time being.

th

Hence, I had to look for primary data for the research (Figure 11 and 12). I required information for the following six criterias. 10 years of quarterly data for new house prices, number of new houses on sale and the number of houses being traded per quarter. Similarly, I required 5 years of quarterly data for land prices in Chandigarh, Zirakpur (outskirts of Chandigarh) and rural areas around Chandigarh. For this purpose, I visited 10 of the most prominent property dealers in Chandigarh for the data. Access was gained because of family connections as my family has keen interest 28

in investing in real estate, which I admit is one of the motivating factors for me to undertake this research.

One problem faced while collection was that real estate prices are never standardized and vary from property to property even in the same area because of various reasons, some of them being urgency to buy or sell, information asymmetry, etc. The result of which prices obtained from different real estate broke had minor deviations thus making it necessary to take averages of all the data gathered. Data acquired from them was then averaged for the purpose of analysing.

Data regarding the number of houses being traded at any particular time span was collected from the government office where change of ownership of properties is registered. One limitation implied by this process of data collection is that it ignores the trading taking place in the market without actual transfer of ownership. In India, change of ownership usually takes place 2-3 months after the deal is undertaken for a particular property. In some cases, the property is resold to another person during this time span without the first sale being registered with the government. But the number of such cases are not substantial enough to affect our research results hence for this study we will ignore this criteria.

Majority of the researches carried out around the world have a hypothesis which the study sets out to prove to disprove. But to formulate hypothesis for this particular study was not very logical and there is a very basic reason behind it. To formulate a meaningful hypothesis, we generally require past research into that particular field but as we discussed earlier this is not the case in our field of research. No literature is

29

present focusing on the real estate trends in the states of Punjab and Haryana. Moreover, this study is not based on testing a hypothesis or a theory. In fact, it is just an exploratory research into the scenario of real estate in and around Chandigarh motivated by the lack of research in this field and the fact that keen investors in real estate are heading for this region expecting high returns for their money.

30

CHAPTER 6: ANALYSIS AND DISCUSSION (SECTION 1)

Data collected on the housing scenario gives insight into the prices of houses (per square feet), number of houses being traded and the new houses that are presently available for purchase. I have added two more variable to the available data. One is the sum of number of houses being traded and presently that are on sale in order to give a complete picture of the number houses that are available in the market. More important than this is the second addition which is the difference in the number of new houses on sale and the number of houses being traded in any quarter in order to get an idea of the number of houses that were constructed in that particular quarter. A limitation to this addition is that any house takes approximately 6 months to construct to the point where it is ready for sale whereas our data is a quarterly data. Hence, for our research we will ignore the 3 months lag in construction of houses that is present in the market. It takes to approximately 3- 6 months for the developers and builders to benefit from any opportunity that they see in the market, similar to the hog cycle.

PRICE 2500 PRICE PER SQ. FT. 2000 1500 1000 PRICE

500 0 1 4 7 10 13 16 19 22 25 28 31 34 37 40 TIME

Figure 5: Price of New Houses

31

Plotting the price of houses against a time line shows that appreciation in prices in 10 years is not gradual (Figure 5). From the start of 1997 till the end of 2002, prices appreciated approximately 6- 8 percent per annum. It was from the start of the year 2003 till the third quarter 2006 that prices rose dramatically. The appreciation touched unbelievable levels of almost 30- 35 percent increase per annum. Similar results are shown by the number of houses that came in the market for sale because of this appreciation.

In the following part, we will use regression analysis for different variables and try to analyse the results.

Price of a commodity is generally dependent on the demand that that the particular commodity generates in the market. In our case, number of houses being traded in the market will have an effect on the price of the houses. In order to find the relationship we will run regression with price as the dependent variable and number of houses being traded as the independent variable (Figure 6).

Pr = Xo + Volume* X1 + e Pr = Price of the house (per sq. ft.) Volume = Volume traded in the market e = Error term Volume and price have a high collinearity between them with Pearson correlation coefficient r = 0.952. Since we have only one independent variable, hence we

32

cannot violate the multicollinearity assumption and our Tolerance and VIF values are not a matter of concern.

In the third quarter of the year 2006, our model predicts price of Rs.1651 whereas actual price is Rs.2100 which is an unusual case. This can be attributed to phenomenon of a bubble formation before the prices are about to fall which is what happened in the fourth quarter where prices experienced some correction. In order to check whether this strange case is having any undue influence on the results of our model we will check the value of Cooks Distance. The maximum value is 0.720 which is less than the problematic value of 1 or more. Looking at the value of R we see that, 90.6 percent of the variance in the dependent variable is explained by the model which is quite high. Our model is also statistically significant (Sig. = .000).
2

Beta value of 0.952 is similar to Pearson correlation coefficient as we have only on independent variable in our model which makes all the contribution in explaining the dependent variable. The results of the analysis of our model tell that price is almost completely dependent on the volume being traded in the market with an exception of the 3 quarter in the year 2006.
rd

Further, we will analyse the effect that volume being traded in the market has on the developers and builders. Real estate developers in logical world would try to meet the demand and start building more houses if they realize that demand of a new house is increasing in the market. We will run regression test with volume traded as the independent variable and our dependent variable will be the number of houses that builders start constructing in that same time span.

33

New houses = Xo + Volume* X1 + e New houses = number of houses that builders start constructing in that same time span Volume = Volume traded

Analysis of the result (figure: 7) shows that volume being traded in the market correlate substantially with number of new house projects, i.e. 0.932 (Pearson correlation coefficient), which is quite high. Similar to above test, here also we have only one independent variable, and hence tolerance and VIF values will be ignored in this case also. The scatter plot depicts that most of our values lie around the centre (along the 0 point) with a few outliers which proves that our model does not violate the assumptions. Casewise Diagnostics shows that second and third quarter of year 2005 and third quarter of year 2006 exhibit out of the trend results but the residual value is less than 3 i.e. ( 2.46, 2.46, and 2.54) respectively, hence these three cases will not substantially affect our model. Moreover, the maximum value of Cooks Distance i.e. 0.489 is under tolerable limits. Value of R in our model is 0.869, hence our model proves that 86.9 percent of the variance in the dependent variable which I again a respectable result. Our model is also statistically significant (Sig. = .000).
2

Beta value of 0.932 is similar to Pearson correlation coefficient as we have only on independent variable in our model which makes all the contribution in explaining the dependent variable. The results of the analysis of our model tell that number of new housing projects coming in the market are almost completely dependent on the

34

volume being traded in the market with an exception of the second and third quarter in the year 2005 and third quarter of year 2006. But it should be noted that, these exception are under the tolerable limits of any regression model.

Measuring the slope of price, volume traded and houses on sale against the time trend, we notice that slope of line denoting new houses on sale is the highest. Looking at the scenario from the point of view of volume traded in the market, we see that developers have behaved a tad too optimistically and flooded the market with new houses even though there was not a sharp rise in the demand for new houses (slope of volume traded = 0.017235 and slope of new houses in market = 0.03356). This over flooding of the market can explain to some extent the correction in new house prices that has come in the last quarter of year 2006 with prices back to Rs. 2000 per sq. ft. from Rs. 2100 per sq. ft.

New Houses on Sale

9000 8000 7000 6000 5000 4000 3000 2000 1000 0 0 500 1000 1500 Volume Traded

Volume against New Houses

The chart above verifies this fact even further as number of new houses on sale has increased dramatically even though there is no substantial increase in the volume being traded in the market. What should be kept in mind that this correction in prices

35

is a very temporary phase as there is a huge shortage in housing in India and particularly Chandigarh as discussed in the initial sections of this research.

2500 2000 1500 1000 500 0

Price

Ne w Houses on Sale

Similar results are depicted when price is plotted against new houses on sale. That is, inflow of new houses in to the market is not very well explained by the price appreciation. Again this result should be analysed with caution as there are always barriers to variables (price in our case) because of which it cannot cross a certain limit and hence, it can never have a linear relationship with the supply of a commodity.

In order to gain a better insight into the nature of fluctuations in price with the respect to the demand or volume being traded in the market, a graph was plotted with the residual values of price and volume traded. Analysis of this chart gives interesting results. X-axis is for volume and Y-axis for price. The starting tip of the graph is (0.099, 0.062). It is quite clear from the chart that price behaves around its trend line in accordance with the demand in the market. 36

Price and Volume Residual Value Plotting 0.15

0.1

0.05 Price Price and Volume Residual 0 0.1 0.2

0 -0.2 -0.1

-0.05

-0.1

-0.15 Volume

Let me explain, if we follow the graph from its starting tip, we notice that at a certain price level the demand for new houses falls back towards its trend line. This decrease in demand according to its trend over the past, results in fall in prices with prices falling way beyond the trend in the past (fourth quarter of the graph). Decrease in the prices of new houses has been ideally accepted by the demand for new houses and we see that volume being traded in the market again starts to move towards its usual trend and in fact rises quite dramatically (second quarter of the graph). This increase in demand is well reflected by price as it (in second quarter) surges ahead of its trend in the past. Hence, though their has been a general appreciation in price and increase in

37

demand in the past 10 years in the market, but the trend of appreciation in prices and increase in demand does follow a cycle similar to the hog cycle.

Though, the chart mentioned above does give a certain logical trend for the price and demand of new houses but a similar plot of other variables failed to provide a understandable cycle. The market for housing is a fragmented and not wholly consistent one, often variable in short distances or over brief times. Differences in price for houses are often reflected back into differences in price for undeveloped land, but that also in varying degree (Clawson, 1962).

38

CHAPTER 7: ANALYSIS AND DISCUSSION (SECTION 2)

The data regarding the average price of land per gaj

was plotted on a graph and

interesting results were obtained (Figure 8). The most peculiar result obtained from the graph was that the prices exhibited similar trend as shown by the price line of new houses when plotted against time.

2500 PRICE PER GAJ 2000 1500 1000 500 0 01/01/02 TIME Figure 8 : Average Land Cost per Gaj Chandigarh Rural Zirakpur

30/06/05

Another point to notice is that, in the time span of 5 years land prices in Chandigarh appreciated by almost 120 percent, on the other hand, land price appreciation in Zirakpur and rural areas is around 300 percent and 250 percent respectively. Land prices of Chandigarh were higher by 20 percent than land prices in Zirakpur in the beginning of year 2002 and this trend continued till the end of year 2003. But from their on land prices of Zirakpur shot up so dramatically that by the end of year 2006
7

1 gaj = 9 square feet that is 3 feet * 3 feet = 1 gaj.

39

land prices in Zirakpur were more than 50 percent higher than prices in Chandigarh. In fact, what is more interesting to notice is that the land price appreciation of land under Chandigarhs jurisdiction is much less than the appreciation of land prices in rural areas around Chandigarh. This is a strange trend compared to real estate trends in any other part of India or around the world as distance from a major urban centre is expected to have a negative effect on the per unit price of land (Hushak, 1975). In Prince William County, Virginia, on the periphery of Washington D.C., each additional mile from the urban periphery decreased the per acre value of unimproved land by about $172 (Clonts, 1970), opposite of what we witness in Chandigarh.

3.5 3 2.5

Zirakpur Chandigarh Rural

Price

2 1.5 1 0.5 0
Jan 02 Dec 06

Time

Figure 9 : Average Land Cost per Gaj (Log values)

40

A plot of the log values of prices against time provides a better insight into the trends in real estate prices as it is here we see that the actual appreciation in rural land is more than appreciation in land in Chandigarh.

The only possible reason that can explain this strange phenomenon is the fact that Chandigarh Municipality does not allow construction on lands surrounding Chandigarh whereas lands in Zirakpur can be constructed and developed. Following is a map of Chandigarh and its surroundings to better explain our analysis. The rectangular blocks or sectors on the map are the urban areas of Chandigarh. Towards the south- west sub urban areas are present or the town of Zirakpur. Out side these sub urban construction is not allowed as this is the periphery area of Chandigarh. Periphery of Chandigarh extends up to the dark black line which is known as the state boundary or Chandigarh jurisdiction. Outside the jurisdiction is the rural area.

41

The Chandigarh Periphery Controlled area was created with the twin objectives of ensuring a planned future expansion of the New Capital City and to prevent mushrooming of unplanned construction around it. In order to maintain its architectural beauty and ecological balance, to give it a healthy and planned development and prevent the growth of slums and ramshackle construction on its periphery, it was decided to regulate the construction activity around this planned city by the Punjab New Capital Periphery Control Act 1952, which prohibits any change of land use within the radius of 16 km of its outer boundaries except for bona-fide use, that too, with prior permission, exempting the areas falling within in the villages redline and limits of notified area or municipality . Unplanned construction in the periphery is usually referred to as urban sprawl is widely acknowledged as an undesirable form of development, due to its economic, social and environmental disadvantages. Attempts to control urban sprawl are frequently based on land-use plans at the national, regional and metropolitan levels (Razin, 1998).
8

Retail and housing projects have come up in Zirakpur and investors are more interested in investing in lands in Zirakpur. Municipality claims that it does not allow construction in Chandigarhs periphery in order to maintain the beauty of the city which makes the land under Chandigarhs jurisdiction no better than rural land that is, only fit for agriculture. But even after similar land use patterns, land appreciation in Chandigarh is way less than rural land because of the fact that Chandigarh land prices are already escalated with less scope of appreciation as compared to the rural land. Moreover, prices in these areas as well as the sub urban areas (Zirakpur) are in the catch up state with the prices in central parts of Chandigarh. A large population of

http://www.tribuneindia.com/2001/20011029/biz.htm (Accessed on 17th Aug 07)

42

the city is unable to afford housing on account of its very high cost and has gravitated into the villages in the immediate vicinity of the city as well as several unplanned and unauthorized new colonies hence resulting in land price appreciation in these areas.

Similar phenomenon has been witnessed in many parts of the world where Urban Growth boundaries prohibit or discourage construction and growth outside a boundary or a politically designated line. An examination of housing-production trends and home prices in Napa County, California found that housing prices soared in rural parts of the county as demand outstripped supply, increasing the price premium for rural housing from 16.3 percent in 1985 to 84.8 percent over the county average in 1997. This appreciation was because of the Urban Growth boundary applied by the government (Staley and Mildner, 1999). Though popular, the full consequences of adopting these growth controls have not been fully explored.

While many are geared toward curbing suburban development in outlying rural areas, growth boundaries can have unintended economic and social consequences. By restricting land availability for new housing, growth boundaries could increase the price of land and, ultimately, housing. The most troubling characteristics of urbangrowth boundaries, however, may be the inequities they create between existing homeowners and low- and moderate-income families. As affordable housing disappears, economically vulnerable low- to moderate-income households suffer the most and move to the country side in search of homes and hence the price appreciation in these areas. A similar study by Clawson (1962) reports that, some farm or rural lands have relatively high values as compared to urban areas and settlements. But it should be noted that the value of the land arises from the urban

43

settlement not from agricultural production. The urban settlements referred here have come up because of the Urban Growth boundaries applied by the government.

In order to reform the periphery act a committee was formed by the state government to 10
th

Sep 03 that gave the following the recommendations . 1)

Committee suggested the preparation of a comprehensive Land Use Plan for the entire Periphery Controlled Area. Such a broad land use plan could provide for urban zones, industrial parks, institutional and residential areas where such development could be taken up while also highlighting the trunk services and infrastructure to support such development. It also highlighted the sub-areas which need to be preserved and conserved in order to effectively protect the qualit y of environment and ecology in the Periphery. 2) Suitable pockets for Housing/Residential use in the Periphery area be marked which can be developed by the Private parties or Government/Semi-Government Agencies. 3) Institutions related to sports, leisure, education, etc which require large open/vacant land area but smaller built-up area, can be considered for location within the entire Periphery. Research is available related to the government policies affecting the real estate economy of the area (Kim and Kim, 2000), (Kim, 1997), (Kim and Kim, 1999), (Hannah, et al, 1993), (Green et al, 1993).

While analysing the data, a correlation test on the average land prices of all the three areas was performed (Figure 10). All the three data sets are significantly related to each other with a Pearson correlation coefficient value= 0.989 for Chandigarh and Zirakpur, 0.979 for Chandigarh and Rural areas and 0.992 for Zirakpur and Rural
9

Report of the State-level Committee to recommend a policy framework for the Chandigarh Periphery Controlled Area and regulating constructions therein.

44

areas. All these values are so close to each other which results in no meaningful interpretation of the data. Probability value is less than .05 hence proving our results to be genuine.

Though these results might seem trivial at first glance but there is one very important piece of information present in this data. As discussed above, price appreciation of land under the jurisdiction of Chandigarh is not justified and realistic. Especially considering the fact that, rural lands have appreciated much more than lands in Chandigarh. It is also discussed that this strange trend is attributed to the fact that Periphery Act applies around the boundaries of Chandigarh. The removal of Periphery Act is only a matter of time considering the population explosion because of the development of infrastructure, retail, IT, and other industries. Government census predicts a 40.33 percent growth in population of Chandigarh in the next decade (20012011) . Hence, from the investors point of view investments in the periphery of Chandigarh can give tremendous returns because prices of these lands in the coming future have to surpass prices of Zirakpur as they fall under Chandigarh jurisdiction.
10

A positive step towards this direction has already been taken as government authorities have started approving residential projects with more than 100 acres of land and provide proper amenities to the people e.g. road network, water supply, power supply, sewerage facilities, etc in the periphery area of Chandigarh. The new Periphery Act passed by the government can only give a boost to the already

10

http://chandigarh.nic.in/knowchd_general.htm (Accessed on 17th Aug 07)

45

flourishing housing schemes as Punjab governments give nod to the mega projects within the periphery, provided that the project is not less than 100 acres .
11

Another interesting trend in the chart to note is that though appreciation in land prices is different for the three regions but the appreciation in prices of these regions was witnessed in the same time span. What I mean to say is that, stagnation, appreciation and depreciation in the prices of these areas was witnessed in same time periods. For example, there was no appreciation in all the three areas till the end of second quarter of the year 2003. For the next one year, the areas had a moderate appreciation. Real appreciation in prices came after the second quarter of 2004 till the second quarter of 2006 and this trend was similar for all the three regions. Even the slight correction in prices after second quarter of 2006 is witnessed by all regions.

What is important to remember in this analysis is that, we are only discussing the similarity in the trend in prices of these areas and not the actual increase which is not similar. It can be safely stated that, demand for land is not a phenomenon that concentrated to a particular area. The increase in demand and subsequent increase in the prices of land comes about in the whole region including Chandigarh, suburban area and its periphery.

Looking at the property trend charts, it raises a question in our mind that what caused this sudden real estate boom in and around Chandigarh in the first quarter of 2004. There has to some sort of triggering factor that can be stated as the real cause of this boom. My discussion with the property dealers during the process of data collection
11

http://cities.expressindia.com/fullstory.php?newsid=158242 (Accessed on 17 Aug 07)

th

46

brought two most prominent factors that they feel led to this boom. Firstly, it is the effect of a general real estate boom in the whole country because of the growing economy and increased FDI, as is evident from the Property Price Index given in the chapter on methodology. The second prominent reason is the setting up of a technology park in Chandigarh (Rajiv Gandhi Chandigarh Technology Park) and promotion of Chandigarh as the new IT hub of northern India. By setting up the Chandigarh Technology Park, Chandigarh Administration has taken a step towards providing world class facilities in Chandigarh so that not only employment at the highest level but also the economy of Chandigarh and the region would get a boost. Chandigarh Administration looks at Chandigarh as a regional hub for IT along with Mohali and Panchkula . RGCTP was conceived by the government in 2001. Because of the huge demand from IT Companies for more working space and residential needs of the IT community working in the RGCTP, residential and retail projects were launched in the suburban areas of Chandigarh. It is expected that about 10000 Engineers/Professionals shall start working at RGCTP by December 2006. A total of 25000 professionals are expected to work at the RGCTP once it is fully established . The demand of land for these professionals is said to be the triggering factor in Chandigarh real estate.
13 12

12 13

http://chdit.nic.in/ctp_detail.htm (Accessed on 24th Aug 07) http://chdit.nic.in/ctp_detail.htm (Accessed on 24th Aug 07)

47

CONCLUSION

The analysis of our data indicates that in Chandigarh, appreciation in prices in 10 years is not gradual. From the start of 1997 till the end of 2002, prices appreciated approximately 6- 8 percent per annum. It was from the start of the year 2003 till the third quarter 2006 that prices rose dramatically. The appreciation touched unbelievable levels of almost 30- 35 percent increase per annum. Kan et al (2004) state that when the economy receives a favourable technological shock, the demand for both commercial and residential property tends to increase which is seems to be the case in Chandigarh as Rajiv Gandhi Chandigarh Technology Park (RGCTP) was brought under construction in the year 2001.

Price of new houses is almost completely dependent on the volume being traded in the market with an exception of the 3
rd

quarter in the year 2006. The number of new

housing projects coming in the market are also almost completely dependent on the volume being traded in the market with an exception of the second and third quarter in the year 2005 and third quarter of year 2006. Earlier studies indicate that the most important factor in the determination of house prices is real income (Nellis and Longbottom, 1981), which has been on the rise in India in the past. Most importantly, though their has been a general appreciation in price and increase in demand in the past 10 years in the market, but the trend of appreciation in prices and increase in demand does follow a cycle similar to the hog cycle.

Looking at land prices in different regions, in the time span of 5 years land prices in Chandigarh have appreciated by almost 120 percent. On the other hand, land price

48

appreciation in Zirakpur and rural areas is around 300 percent and 250 percent respectively. This is attributed to the over all economic growth witnessed by the country in the past decade. Property prices are intimately related to macroeconomic variables. In particular, property prices are expected to be positively correlated with real output growth (Leung, 2003). An increase in general productivity would increase the demand for residential and commercial property, hence increasing the real estate prices. (Kan et al, 2004). The difference in appreciation in different can have strategic implications for real estate investors. Investments in the periphery of Chandigarh can give tremendous returns because prices of these lands in the coming future have to surpass prices of Zirakpur as they fall under Chandigarh jurisdiction. Another interesting trend in the chart to note is that though appreciation in land prices is different for the three regions but the appreciation in prices of these regions was witnessed in the same time span. Stagnation, appreciation and depreciation in the prices of these areas were witnessed in same time periods.

With real estate becoming an industry in itself and one of the primary forces to drive the economy of a nation like India, it may be beneficial if real estate trends in other metropolitan and sub metro cities are researched.

49

APPENDIX

Figure 1. Simple Cobweb Model

Figure 2. Three Linear Cases

50

Figure 3. Price Support Models

51

Figure 4. The Cobweb Theorem with a 2 year lag in response.

PRICE 2500 PRICE PER SQ. FT. 2000 1500 1000 PRICE

500 0 1 4 7 10 13 16 19 22 25 28 31 34 37 40 TIME

Figure 5: Price of New Houses

Descriptive Statistics Mean 979.7500 595.0000 Std. Deviation 418.24412 358.77641 N 40 40

Price Volume

Correlations Price 1.000 .952 . .000 40 40 Volume .952 1.000 .000 . 40 40

Pearson Correlation Sig. (1-tailed) N

Price Volume Price Volume Price Volume

Variables Entered/Removed(b) Variables Entered Variables Removed

Volume(a) . a All requested variables entered. b Dependent Variable: Price

Model 1

Method Enter

52

Model Summary(b) Adjusted R Square .904 Std. Error of the Estimate 129.76678

.952(a) .906 a Predictors: (Constant), Volume b Dependent Variable: Price

Model 1

R Square

ANOVA(b) Sum of Squares Regression 6182299.6 46 Residual 639897.85 4 6822197.5 Total 00 a Predictors: (Constant), Volume b Dependent Variable: Price Model 1

df 1 38 39

Mean Square 6182299.646 16839.417

F 367.133

Sig. .000(a)

53

Coefficientsa Unstandardized Coefficients (Constant) Volume B 319.458 1.110 Std. Error 40.106 .058 Standardized Coefficients Beta .952 t 7.965 19.161 Sig. .000 .000 95% Confidence Interval for B Lower Bound 238.267 .992 Upper Bound 400.650 1.227 Zero-order .952 Correlations Partial .952 Part .952 Collinearity Statistics Tolerance 1.000 VIF 1.000

Dependent Variable: Price

54

Collinearity Diagnostics(a) Variance Proportions (Constant) .07 .93 Volume .07 .93

Model 1

Dimension 1 2

Eigenvalue 1.859 .141

Condition Index 1.000 3.634

a Dependent Variable: Price

Casewise Diagnostics(a) Predicted Value 1651.1390

3.459 a Dependent Variable: Price

Case Number 39

Std. Residual

Price 2100.00

Residual 448.86101

Residuals Statistics(a) Minimum 652.3785 -.822 20.520 654.6940 362.11237 -2.790 -2.981 413.37360 -3.361 .000 .000 .000 Maximum 1873.0858 2.244 50.938 1849.9679 448.86102 3.459 3.642 497.58002 4.454 5.034 .720 .129 Mean 979.7500 .000 27.680 980.3367 .00000 .000 -.002 -.58673 .009 .975 .052 .025 Std. Deviation 398.14633 1.000 8.818 399.24303 128.09230 .987 1.034 140.77626 1.148 1.395 .152 .036 N 40 40 40 40 40 40 40 40 40 40 40 40

Predicted Value Std. Predicted Value Standard Error of Predicted Value Adjusted Predicted Value Residual Std. Residual Stud. Residual Deleted Residual Stud. Deleted Residual Mahal. Distance Cook's Distance Centered Leverage Value a Dependent Variable: Price

55

Normal P-P Plot of Regression Standardized Residual

Dependent Variable: Price

1.0

0.8

Expected Cum Prob

0.6

0.4

0.2

0.0 0.0 0.2 0.4 0.6 0.8 1.0

Observed Cum Prob

56

Scatterplot

Dependent Variable: Price

4

Regression Standardized Residual

-2

-1

Regression Standardized Predicted Value

Figure 6: Regression Results for Volume and Price.

Descriptive Statistics Mean 1869.0000 595.0000 Std. Deviation 1969.48588 358.77641 N 40 40

New_Vol Volume

Correlations New_Vol 1.000 .932 . .000 40 40 Volume .932 1.000 .000 . 40 40

Pearson Correlation Sig. (1-tailed) N

New_Vol Volume New_Vol Volume New_Vol Volume

57

Variables Entered/Removed(b) Variables Entered Volume(a) Variables Removed .

Model 1

Method Enter

a All requested variables entered. b Dependent Variable: New_Vol

Model Summary(b) Adjusted R Square .866 Std. Error of the Estimate 722.01083

.932(a) .869 a Predictors: (Constant), Volume b Dependent Variable: New_Vol

Model 1

R Square

ANOVA(b) Sum of Squares Regression 131466723 .771 19809386. Residual 230 151276110 Total .000 a Predictors: (Constant), Volume b Dependent Variable: New_Vol Model 1

df 1 38 39

Mean Square 131466723.77 1 521299.638

F 252.190

Sig. .000(a)

58

Coefficientsa Unstandardized Coefficients (Constant) Volume B -1175.870 5.117 Std. Error 223.149 .322 Standardized Coefficients Beta .932 t -5.269 15.881 Sig. .000 .000 95% Confidence Interval for B Lower Bound -1627.610 4.465 Upper Bound -724.129 5.770 Zero-order .932 Correlations Partial .932 Part .932 Collinearity Statistics Tolerance 1.000 VIF 1.000

Dependent Variable: New_Vol

59

Collinearity Diagnostics(a) Variance Proportions (Constant) .07 .93 Volume .07 .93

Model 1

Dimension 1

Eigenvalue 1.859

Condition Index 1.000 3.634

2 .141 a Dependent Variable: New_Vol

Casewise Diagnostics(a) Predicted Value 5476.7867 5476.7867 4965.0439

Case Number 34 35

Std. Residual -2.461 -2.461

New_Vol 3700.00 3700.00 6800.00

Residual 1776.7867 0 1776.7867 0 1834.9561 0

39

2.541

a Dependent Variable: New_Vol

Residuals Statistics(a) Minimum 359.3588 -.822 114.171 365.2983 1776.7867 4 -2.461 -2.629 2028.3115 2 -2.868 .000 .000 .000 Maximum 5988.5293 2.244 283.417 5877.1479 1834.9560 5 2.541 2.676 2034.1207 3 2.931 5.034 .489 .129 Mean 1869.0000 .000 154.007 1871.9015 .00000 .000 -.002 -2.90152 -.005 .975 .059 .025 Std. Deviation 1836.01243 1.000 49.063 1839.76236 712.69417 .987 1.040 791.34861 1.098 1.395 .130 .036 N 40 40 40 40 40 40 40 40 40 40 40 40

Predicted Value Std. Predicted Value Standard Error of Predicted Value Adjusted Predicted Value Residual Std. Residual Stud. Residual Deleted Residual Stud. Deleted Residual Mahal. Distance Cook's Distance Centered Leverage Value

a Dependent Variable: New_Vol

60

Normal P-P Plot of Regression Standardized Residual

Dependent Variable: New_Vol

1.0

0.8

Expected Cum Prob

0.6

0.4

0.2

0.0 0.0 0.2 0.4 0.6 0.8 1.0

Observed Cum Prob

61

Scatterplot

Dependent Variable: New_Vol

3

Regression Standardized Residual

-1

-2

-3 -1 0 1 2 3

Regression Standardized Predicted Value

Figure 7: Regression Results for Volume and New Projects

2500 2000 PRICE PER GAJ 1500 1000 500

Zirakpur

Chandigarh Rural

0 TIME TIME

Figure 8: Average Land Cost per Gaj 62

Correlations

Average_Land _Cost_Per_Gaj Average_Land_ Cost_Per_Gaj F4 Pearson Correlation Sig. (2-tailed) N Pearson Correlation Sig. (2-tailed) N F5 Pearson Correlation Sig. (2-tailed) N ** Correlation is significant at the 0.01 level (2-tailed). 1 20 .989(**) .000 20 .979(**) .000 20

F4 .989(**) .000 20 1 20 .992(**) .000 20

F5 .979(**) .000 20 .992(**) .000 20 1 20

Figure 10: Correlation Results.

2002 2002 2002 2002 2003 2003 2003 2003 2004 2004 2004 2004 2005 2005 2005 2005 2006 2006 2006 2006

1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

Average Land Cost Per Gaj Chandigarh Zirakpur Rural 600 500 200 600 500 200 600 500 200 600 500 200 600 500 200 600 500 200 620 520 210 650 550 210 700 600 225 750 650 250 800 750 300 1000 1000 350 1050 1300 400 1100 1500 500 1200 1800 600 1200 1800 600 1300 2000 700 1300 2000 700 1400 2100 800 1300 2000 750

Figure 11: 5 yr quarterly data on land prices

63

Year 1997 1997 1997 1997 1998 1998 1998 1998 1999 1999 1999 1999 2000 2000 2000 2000 2001 2001 2001 2001 2002 2002 2002 2002 2003 2003 2003 2003 2004 2004 2004 2004 2005 2005 2005 2005 2006 2006 2006 2006

Quarter 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

Price Volume New 600 300 500 600 300 500 600 300 525 600 310 530 600 325 530 650 325 550 700 325 550 740 325 550 740 350 575 750 350 600 750 350 650 750 375 800 750 375 850 730 380 850 725 380 1000 725 390 1100 725 400 1300 725 415 1400 750 425 1500 750 450 1650 800 450 1750 800 500 1900 800 500 2000 820 450 2200 850 500 2200 900 500 2400 910 550 2500 950 500 2600 1000 500 3000 1100 600 3000 1250 700 3200 1350 700 3300 1400 1200 5000 1400 1300 5000 1600 1300 5000 1600 1200 5000 1700 1300 8000 1900 1300 8000 2100 1200 8000 2000 1400 8000

Vol+New 800 800 825 840 855 875 875 875 925 950 1000 1175 1225 1230 1380 1490 1700 1815 1925 2100 2200 2400 2500 2650 2700 2900 3050 3100 3500 3600 3900 4000 6200 6300 6300 6200 9300 9300 9200 9400

NewVol 200 200 225 220 205 225 225 225 225 250 300 425 475 470 620 710 900 985 1075 1200 1300 1400 1500 1750 1700 1900 1950 2100 2500 2400 2500 2600 3800 3700 3700 3800 6700 6700 6800 6600

Figure 12: 10 yr quarterly data on housing market

64

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