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Affordability, Housing Demand and Housing Policy in Urban India

Housing Development Finance Corporation, Ramon House, 169 Backbay Reclamation, Mumbai 400 020, India, piyush{at}hdfcindia.com.

Jyoti Parikh

Indira Gandhi Institute of Development Research Goregaon(E), Bombay 400 065, India

Designing housing policies and programmes requires a careful estimation of household affordability and demand for housing. The efficiency of housing subsidies would depend on price elasticities of housing demand. Different households have different perceptions of housing demand based on their economic and demographic factors. We estimate the demand function of housing for urban India using step econometric analysis. The first step estimates the hedonic price index for states and in the second step the demand for housing is estimated as a function of economic and household characteristics. The problem of multicollinearity is observed with the data. Ridge regressions are used to correct for multicollinearity and to obtain efficient estimates. The results indicate that the housing demand is inelastic with respect to income and price. The income elasticity is 0.75 while price elasticity is slightly less than — 1. A further analysis to estimate income and price elasticities for different income classes as well as states has also been carried out. We comment on the efficiency of housing subsidies based on our results. The paper concludes with some policy questions.

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