House prices in India are rapidly rising due to lack of a well-developed market and a chronic shortage of housing, estimated at 18.8 million units in 2012, mainly in urban areas (Gol). The shortage was broadly attributed to congestion (15 million) followed by obsolescence (2 million) and homelessness (1 million). This paper documents the characteristic and business practices prevailing in terms of determinants of house prices, role of lending institutions and their policies, drivers of credit flow, credit sources, interest rate regimes, regulators and housing indices in the Indian housing sector in comparison with US and Spain.
JEL Classification Numbers: C43, R31, E44
Keywords: Housing, House Price Indexes, Asset prices.
Housing is an important sector for any economy as it has inter-linkages with nearly 269 other industries. The development of housing sector can have direct impact on employment generation, GDP growth and consumption pattern in the economy. To help develop housing in the country, there is need to have a well-developed housing finance market. In India, housing finance market is still in its nascent stage compared to other countries. The outstanding amount of housing finance from all sources accounts for less than 8 per cent of GDP when compared with 12 per cent in China, 29 per cent in Malaysia, 46 per cent in Spain and 80 per cent in the US.
The demand for housing is increasingly being made by individuals and households given increasing level of income and prosperity. The supply of houses have to come from builders, developers and construction companies scattered widely across the country, both in the private and public sector when examined in the context of demand and supply of housing units, especially in the face of scarce land in the urban areas.
In India, housing finance market is very complex. The government, both at centre and states, is a facilitator and is assisted by two regulators, Reserve Bank of India (RBI) and National Housing Bank (NHB). The housing finance market is dominated by commercial banks, both domestic and foreign. In addition, there are cooperative banks and housing finance companies, self-help groups, micro-finance institutions, and NGOs. The RBI regulates commercial banks and partially cooperative banks (which are mainly governed by the State Governments under State Cooperative Acts) while the NHB regulates the housing finance companies. The others are not regulated by any authority in the country.
The financial sector reforms initiated in 1985 and 1991 unleashed development forces in the economy. This resulted in higher employment, increased income levels, faster urbanisation and higher demand for houses, especially in urban areas. Therefore, concerted efforts were made by the Government and the Reserve Bank to encourage housing during the 1990s. The long term goal of the National Housing Policy, announced by the Government in 1998, was to eradicate houselessness, improve the housing conditions of the poor and provide minimum level of basic services and amenities to all. Fiscal incentives were also granted, in general, to the housing sector. The government has been initiating as well as strengthening measures to extend housing to the weaker sections of the society. A number of measures were announced from 2001 but a concerted effort was made in 2006 after some fears were expressed that there was a housing bubble developing in India which could eventually burst. It was then recognized that role of housing could be critical in India and therefore measures announced thereafter aimed to improve business environment in the country.
The housing sector has been considered by a number of studies to be an important cause of the recent financial crisis in the US and Europe. Hence, it would be interesting to examine business environment and practices regarding the housing sector in the US and some selected country in Europe. In Europe, Spain lists among the category of countries that have gone through the utmost rise in property prices over and above their long-term average levels. Also, Spain was amongst those countries that had historically been inclined to the sharpest swings in real property prices, as measured by standard deviation. Since 2008, a major correction has taken place in the housing prices in Spain.
This paper examines the business practices in India and compares it with the US and Spain. The material on India, presented in the paper, in view of lack of data series and literature on India, is based not only on published material but also that collected from interaction with commercial banks, real estate agents, builders and select housing research firms in India. The paper is organised in the following sections--In Section 2, a brief review of literature is presented. In Section 3, role of government in India, both centre and states, RBI and NHB is discussed followed by a brief analysis of flow of credit to the housing sector from different financial institutions. In India, especially in urban areas, there is severe shortage of housing units, which is discussed in Section 4. The characteristic shortcomings of housing sector in India are discussed in Section 5. The housing markets in the US and Spain are well developed and mature. Salient features of these two markets are presented in Section 6. A comparison of housing markets in the three countries is provided in Section 7. Finally, conclusions and select policy recommendations are made in Section 8.
BRIEF REVIEW OF LITERATURE
A number of empirical studies establish that key determinants of housing prices are income levels, interest rates, supply conditions, demographic changes, number and size of households, maintenance costs, property taxes, and speculative pressures [Poterba, 1984; OECD, 2005],
House prices are an important determinant of household sector's gross and net wealth and thereby of consumption and savings. In many countries, including India, house property is the household's largest asset and price developments in housing markets can impact growth directly but mainly through credit channel since real estate can serve as collateral for consumer borrowing [Kiyotaki and Moore, 1997; Bemanke and Gilchrist, 1999] .Furthermore, housing cycles can influence economic activity through wealth effects on consumption and private residential investment mainly due to changes in profitability and the impact on employment and demand in property related sectors.
And if house prices are not aligned with the fundamentals, they can threaten the economic and financial stability of the country mainly because of the macro-financial linkages, as empirical evidence demonstrates. One of the most important causes of financial crises was collapses in real estate prices, either residential or commercial or both [Reinhart and Rogoff, 2008]. There have been cases where such collapses have taken place after bubbles in the real estate prices, and both, the financial sector and the real economy are adversely affected after the bubble bursts. The current crisis can be taken as an example, wherein decline in the real estate prices led to a drastic drop in securitized asset prices in 2007. Further, the instability which followed impacted balance sheets of many financial institutions as was predicted by Feldstein , The financial crisis then got carried forward to the real sector.
Allen and Carletti  argue that the main cause of the recent wide-spread financial crisis was not that there was a bubble in real estate in the U.S. but also because there were a number of such bubbles in a number of other countries such as Spain and Ireland.
Housing sector is impacted by both, monetary and fiscal policy, macro prudential norms and labour policy prevalent in the economy [Hilbers et al., 2008]. To explain the recent crisis, a generally accepted argument was that the loose monetary policy and excessive availability of credit were the causes for the real estate bubble in these countries. As argued by Taylor  these levels of interest rates were lower than in previous U.S. recessions relative to the economic indicators as at the time captured by the "Taylor rule". The low interest rates encouraged borrowing and buying of houses. While Spain had one of the largest deviations from the Taylor rule, this country also had the largest housing boom (measured by the changes in housing investment as a share of GDP). Sweden's Central bank, the Riksbank is one of the rare central banks that have taken the approach of targeting real estate prices. Policy of the Riksbank is to look at property prices during decisions about interest rates [Ingves, 2007]. In comparison with larger countries, the smaller ones have a stronger monetary transmission through the housing channel but a robust financial system is an imperative requirement for such a transmission to be successful.
Cross-country studies indicate that the growth in housing finance depends upon a number of factors such as credit history of the borrower, ability of the financing institution to secure collateral, macroeconomic stability prevailing in the economy and trends in household income [Warnock and Warnock, 2007],
IMF  observed that shocks to disposable income, mortgage interest rates and prices play an important role in short term consumption. In comparison with equity price busts, housing price bursts involve more serious macroeconomic developments. Housing price booms put forward noteworthy risks. Some of the factors which appear to account for the greater severity of housing price busts as compared with equity price bursts are: (i) Wealth effects on consumption are larger in case of housing price busts than in the case of equity price busts; (ii) In comparison with the equity price busts, unfavourable effects of the housing price busts on the banking system (capacity and willingness of the banking system to lend) were stronger and faster; (iii) Link between...