As we enter 2025, with a month away from the next Union Budget, India’s economic landscape has been marked by a dual structural challenge of slowing GDP growth and rising inflation, particularly marked by the volatile rise of prices in the housing sector.
Housing inflation, measured through the Consumer Price Index (CPI) Housing, has shown a steady upward trend throughout 2024, with the index climbing from 177.6 in January to 183 by November.
We analyse the numbers more closely here. This increase underscores the growing cost of living for Indian households, particularly in urban areas, where different patterns of housing and rent forms a significant portion of household monthly expenditure allocation.
We explore the implications of rising housing inflation on GDP growth and consumer behaviour, using the CPI Housing data to provide an analytical perspective.
Rising Housing Costs: Strain on Household Budgets
Rising housing inflation exerts a direct impact on disposable income, reducing the purchasing power of households. For most middle- and lower-income families, housing constitutes a major expense, often consuming 30-40% of total income.
As housing costs rise, less disposable income is available for other expenditures, leading to a contraction in discretionary spending. This, in turn, affects consumption demand, which is a critical driver of GDP growth in a consumption-driven economy like India.
The latest GDP data indicates a slowdown in growth during the last quarter, with private consumption—a major component of GDP—showing signs of weakening. The consistent increase in CPI Housing aligns with this trend, suggesting that rising housing costs are a significant contributing factor to the deceleration in consumption.
Tracking the Trend: CPI Housing Data in 2024
The CPI Housing data for 2024 highlights a steady upward trajectory, with noticeable monthly increases, particularly from August onwards. In August, the index stood at 181.1, rising to 182.7 in October and reaching 183 in November.
This upward trend is indicative of persistent inflationary pressures in the housing sector, driven by a combination of supply-side constraints and rising demand in urban centers. Factors such as limited land availability, high construction costs, and regulatory bottlenecks continue to push housing prices upward, exacerbating the affordability crisis.
For rural households, the situation is further compounded by rising costs of raw materials and labour, which contribute to higher construction expenses under schemes like Pradhan Mantri Awas Yojana-Gramin (PMAY-G).
The implications of rising housing inflation extend beyond individual households to the broader economy. Higher housing costs not only reduce disposable income but also increase household debt levels, as families take on larger loans to finance home purchases.
This increased debt burden can have long-term consequences, including reduced financial resilience and heightened vulnerability to economic shocks.
Moreover, rising housing inflation contributes to overall inflationary pressures, as housing is a key component of the CPI basket. This, in turn, influences monetary policy decisions, with the Reserve Bank of India (RBI) likely to adopt a more cautious approach to interest rate cuts, further impacting economic growth.
From a consumption perspective, rising housing inflation has a cascading effect on spending patterns. As households allocate a larger share of their income to housing, they are forced to cut back on non-essential expenditures, such as dining out, entertainment, and travel.
This shift in consumption behavior affects sectors such as retail, hospitality, and tourism, which are significant contributors to GDP.
Additionally, rising housing costs can deter younger households from entering the housing market, leading to a slowdown in real estate demand and associated industries, such as construction and home furnishings. This, in turn, impacts employment and income levels, creating a feedback loop that further dampens consumption and economic growth.
Urban-Rural Divide: Structural Challenges in Housing Costs
The relationship between housing inflation and GDP growth is particularly evident in urban areas, where the impact of rising housing costs is most pronounced. Urban households face higher housing costs due to factors such as population density, limited land availability, and speculative investments.
The CPI Housing data for urban centers reveals a sharper increase compared to rural areas, reflecting these structural challenges. This urban-rural disparity in housing inflation highlights the need for targeted policy interventions to address the unique challenges faced by urban and rural households.
Policy Solutions: Mitigating the Impact of Rising Housing Inflation
Policymakers must take a multi-pronged approach to mitigate the impact of rising housing inflation on GDP growth and consumption patterns. First, addressing supply-side constraints in the housing market is crucial.
Measures such as increasing the Floor Space Index (FSI) in urban areas, streamlining regulatory approvals, and promoting affordable housing projects can help increase housing supply and stabilize prices.
Second, enhancing access to affordable housing finance is essential to ensure that rising housing costs do not disproportionately burden middle- and lower-income households. Initiatives such as interest rate subsidies and tax incentives for homebuyers can play a pivotal role in this regard.
Third, investments in rural housing infrastructure can help alleviate inflationary pressures in rural areas. Promoting the use of local materials and techniques can reduce construction costs, while improving rural supply chains can address logistical inefficiencies that contribute to higher prices.
Additionally, integrating housing policies with broader urban planning initiatives can create more sustainable and affordable housing solutions. For example, developing satellite towns and improving transportation infrastructure can reduce demand pressures in congested urban centers, leading to more balanced regional development.
Finally, it is essential to strengthen the social safety net to protect vulnerable households from the adverse effects of housing inflation. Expanding rental assistance programs and increasing the availability of subsidized housing can provide immediate relief to those most affected by rising costs.
Additionally, promoting financial literacy and responsible borrowing practices can help households manage debt more effectively and build long-term financial resilience.
Conclusion: A Path to Balanced and Inclusive Growth
In conclusion, the steady increase in CPI Housing throughout 2024 underscores the pressing need for targeted policy interventions to address housing inflation and its impact on GDP growth and consumption patterns.
By addressing supply-side constraints, enhancing access to affordable housing finance, and promoting sustainable urban development, policymakers can help mitigate the adverse effects of rising housing costs and support economic recovery.
The interplay between housing inflation and consumption behaviour highlights the critical role of housing policy in shaping India’s economic trajectory. With concerted efforts, India can achieve a more balanced and inclusive growth path, ensuring that housing remains accessible and affordable for all.
(Deepanshu Mohan is a Professor of Economics and Dean, OP Jindal Global University. He is Director, Centre for New Economics Studies and a Visiting Professor, London School of Economics and University of Oxford. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses, nor is responsible for them.)